Federal Officials Critical of Privatization Debacles in the States

In a meeting with Texas officials last week, Kevin Concannon, Under Secretary of Food, Nutrition, and Consumer Services at the United States Department of Agriculture (USDA), claimed that there had been a drastic reduction in the timeliness and accuracy of food stamp provisions in the state following the implementation of a privatized system.  In fact, Texas now has the worst performing food stamp program in the entire country.

Texas' Privatization Debacle:  In 2005, Texas granted Accenture a $899 million contract to operate the state's food stamp eligibility program.  However, the venture quickly turned sour, leaving thousands of people without benefits for which they were eligible, prolonging working families' food insecurity.  Under Secretary Concannon finds that the failed privatization system resulted in "a five-year slide" in processing food stamp applicants.

Other critical failures occurred with privatization deals in the state, such as a massive computer crash that destroyed hundreds of the Texas Attorney General's records, including eight months of work and evidence in 81 Medicaid fraud cases.  Texas officials had not been informed of issues that should have raised concern, such as lags in reporting and record retrieval failure. 

Privatization hurts working families who have been hit hardest by the recession:  Under Secretary Concannon's comments mirror a letter he wrote in November 2009 to each state Supplemental Nutritional Assistance Program (SNAP) Commissioner to highlight the pitfalls of privatization and contracting-out social services.  In the letter, he urges states to be mindful of the economic crisis and the impact on families in need.  He further acknowledges the astronomical increase in case loads at a time when state resources are limited.  He also discourages states from contracting out the food stamp intake and application process to for-profit entities.  The letter concludes: "[t]hese (privatization) projects encountered severe problems in meeting critical performance standards and many eligible SNAP applicants have suffered as a result.  Based on the evidence, we do not regard these projects as successfully furthering the purpose of the Program.  We do not support the furtherance of such projects, and believe that they put public funds and our clientele at risk."

Vital public programs, such as Medicaid and food stamps, provide working families, who have been disproportionately affected by the downturn, with a lifeline during these tough economic times.  Efforts to privatize fail to save money, increase efficiency or manage caseloads, and most importantly, fail families that need assistance.  In order to provide protections to vulnerable residents and guarantee that families have appropriate support during a time of economic uncertainty, social service provision should be handled by the government rather than a private contractor.

Privatization hampers economic activity:  Under Secretary Concannon additionally reveals that Texas could be receiving $1 billion more in federal food stamp funds and serve over 650,000 additional applicants if it approved more applications of eligible Texans.  Currently, three million Texans receive food stamps, which is about 55 percent of all eligible for the program.  This is significantly lower than the national average of 67 percent.  Furthermore, Texas supermarkets are losing approximately $1 billion annually in food sales because of the problems with food stamp provision in the state.

Moody's Analytics analyzed the impact of federal investments in the states and found that every federal dollar spent on temporarily increasing food stamps creates $1.74 in economic activity.  Accordingly,  Texas' privatized system actually hampered private industry, market activity, and overall economic growth.

States are taking action: Much like Texas, Indiana initiated an overhaul of its welfare system and granted IBM a $1.34 billion contract to provide services in 2007.  Due to implementation errors, thousands of Hoosiers needing assistance were denied access despite qualifying for services from the state.  From the outset, several Indiana lawmakers and advocacy organizations called for an immediate halt to further privatization.

The system was so problematic that Indiana officials announced that they would be canceling the state's contract with IBM this past October.  Republican Gov. Mitch Daniels admitted that the privatization initiative was a "flawed concept that simply did not work out in practice."  He further cited lack of face-to-face contact and county-based case management, inefficiency of welfare call centers, high error rates, and poor timeliness as the major problems created by the privatized system.

To protect families and ensure that the most vulnerable state residents are receiving necessary services, Indiana Rep. Gail Riecken introduced HB 1003, a bill intended to prohibit the state from privatizing Medicaid and food stamps.  Assessing the issues with the privatized system, she stated, "[t]he system they created wasn’t saving the people of Indiana any money, and there were too many cases of lost documents, delays in determining eligibility and problems in actually getting assistance.  There is no point in allowing these kinds of mistakes to continue, and we should not tolerate any involvement by entities that have a spotty track record.”  The Indiana House Ways and Means Committee approved the bill last month.

As states grapple with the recession and search for the most appropriate methods to alleviate fiscal pressures, some lawmakers will likely propose privatization as an effective policy to garner a short-term infusion of capital.  However, as PSN has discussed in previous Dispatch reports, privatization is an unsustainable policy that comes at the expense of long-term community investments and sound budgeting.  Fortunately, at both the state federal level, there is a growing recognition that privatization often leads to inferior service provision, substantially higher costs, and lost transparency.

Correction: In the original piece as written, PSN regrets that we mistakenly identified IBM, rather than Accenture, as the recipient of the contract for the food stamp eligibility program in Texas.  IBM was awarded a contract by the Texas Department of Information.  Issues with that specific deal led to a computer crash that destroyed eight months of work and evidence in 81 Medicaid fraud cases, which we cite in the piece above.  The company was awarded Indiana’s welfare privatization contract, which was cancelled by the state after problems with the system.  We regret our error in confusing the privatization debacles, among the many that have occurred in Texas and Indiana.


AFSCME - Safety Net for Sale: The Dangers of Privatizing Social Services
The Dallas Morning News - Official: Food-stamp application flub hurt hungry Texas families
The Dallas Morning News - U.S. official blames privatization for food stamp lag, but state agency cites burdened, dated system
Illinois PIRG - Privatization and the Public Interest
Progressive States Network - Privatization During an Economic Downturn: Still Inefficient and Problematic
United States Department of Agriculture (USDA) - Letter to SNAP Commissioners