When Wall Street Runs Welfare

By ADAM COHEN

Here's a cautionary tale about entrusting the free market with the task of caring for the very poor. Connecticut's welfare administrators, swept up in the national tide of reform, decided last year to inject a little private enterprise into their tired bureaucracy. They awarded a $12.8 million contract to Maximus Inc., based in McLean, Va., to put a shine on a state program that pays for child care for working welfare recipients. But within months Maximus found its operations in the kind of disarray it usually takes government years to achieve. More than 10,000 of the 17,000 bills submitted by child-care providers were over 30 days late in being paid. Day-care centers whose bills were past due worried about having to turn away children or let staff go. Parents who tried to contact Maximus encountered what a state administrator called "telephone-system collapse." With its contract in jeopardy, Maximus CEO David Mastran went into crisis mode, nearly tripling the project's staff and showing up in Connecticut himself. The blame lies partly with the state for not anticipating how quickly welfare recipients would find work and need child care, says company spokesman Kevin Geddings. "But we should have taken a much closer look," he says. "We've learned a lot from this."

As states struggle to reinvent welfare, privatization has become one of the hottest trends. To beleaguered welfare officials, hiring private contractors to run state welfare programs holds the promise of unleashing the efficiency and flexibility of the market on dysfunctional state bureaucracies. And to the private companies that are moving aggressively into the field, it dangles the possibility of big profits and high-flying stock prices. Privatization has had some notable successes. In some states it has increased the number of welfare recipients going to work by operating well-managed training and job-placement programs. In others it has raised child-support collections by upgrading computer systems and improving procedures for garnisheeing the wages of absent fathers. But in many other jurisdictions, private welfare providers have been failing on the job or having their contracts canceled, or are facing such charges as abusing program clients and using improper influence with government bodies that hand out work.

Governments have been turning to private industry for help with welfare programs as far back as the 1960s, when Ross Perot founded Electronic Data Systems Corp. Much of its early business was crunching financial data for agencies like the Social Security Administration. But with welfare reform, more work is opening up for private companies than ever before, setting off a welfare-management gold rush. "It's a huge revenue target for the private sector to go after," says Bernard Picchi, an analyst of growth stocks for Lehman Brothers, who estimates the potential market at more than $20 billion a year. Private firms have also been assigned the kind of front-line, person-to-person tasks they have not had in the past. In Milwaukee, Wis., Maximus has been given traditional caseworker duties for part of the city, taking welfare applications and supervising recipients in state-mandated work assignments.

Maximus stands out because its $127 million in annual revenue makes it the nation's largest company specializing in welfare work. Mastran, an Air Force veteran and former Pentagon "whiz kid," got his start managing contracts and grants for the Department of Health and Human Services. He began working alone out of his home and in 22 years managed to build a company that has 1,600 employees in 34 offices nationwide. When Maximus went public this summer, analysts rushed to rate the company a "buy," and the stock is already up almost 50%. But the outlook for private welfare is so bullish that Maximus has to compete with corporate giants like the $14.5 billion EDS and the $27 billion Lockheed Martin of the defense-and-aerospace industry. Lockheed Martin moved into the welfare field about 10 years ago, and with the cold war's end, its government-services division has become the fastest-growing part of the company. Today it collects fully 11% of all child-support payments taken in nationwide.

Maximus, as well as the other private welfare companies, can point to a number of successes across the country. Its "Fairfax Works" program in Fairfax, Va., has moved thousands off welfare into real-world employment, free from government subsidies. A Lockheed Martin welfare program in Dallas has placed 76% of its clients in new jobs paying an average of $431 a week, exceeding federal goals. But the growing number of cases in which things have been going wrong have begun to capture more of the headlines. A Maximus child-support-collection program in Colorado has come under fire by the very district attorney, John Suthers, who originally urged that the company be hired. Although Maximus has so far increased collections about 11% a year, Suthers says, that record is no better than what government workers were doing and is half the improvement he expected. In Virginia, EDS agreed last year to pay $2.3 million in reimbursements and damages after it failed to deliver on a $45 million contract to computerize the state's Medicaid system. And last month Lockheed Martin admitted that the first year of its Baltimore child-support-collection program fell more than 22% short of its promised performance. A demonstration project run by Maryland state workers in a nontraditional manner has so far managed to collect child-support payments at a much higher rate than has Lockheed Martin.

Even more troubling are charges that private welfare workers have acted abusively toward human-services clients. In New Jersey, families with mentally disabled relatives in state institutions were contacted by Maximus and given as few as 10 days to hand over complicated financial data, with the threat that loved ones would be kicked out. "They scared me," says Louise Bilicki, the widowed mother of a 49-year-old who is mentally and physically handicapped. "Their demands were outrageous--if I didn't give the information to them immediately, they would cut off services to my son." State welfare officials met with Maximus, instructing them to be more sensitive. "We do not like to lead with that as a stick," says developmental-disabilities director Robert Nicholas. Maximus says all its case managers go through courtesy training, and that it is not company policy to harass aid recipients.

Critics of welfare privatization say providing human services, which tends to involve small budgets and protracted problems, is not suited to a private system not directly accountable to voters. "They are just not as responsive as public employees," says Geraldine Jensen, president of the Association for Children for Enforcement of Support. "When I go into one of these companies, I'm not talking to a district attorney I can vote out of office." Some critics are troubled by all the money being made. Since taking Maximus public through an IPO this summer, Mastran has made $18.8 million in cash, and he holds stock worth an additional $110 million, though he is barred from selling it for years. Maximus contends that its profits come not from the poor themselves but from improvements it makes in the delivery system. "We only make money off the efficiencies we devise," says Maximus' Geddings.

So is there any role for private companies in welfare reform? The best case for it is the poor job government has historically done on welfare. For all Maximus' problems in the Connecticut child-care program, the state operation it took over had major flaws of its own. Three of its four child-care systems were not even computerized, which meant workers had to calculate benefits by hand and store data in folders. With all this in mind, Connecticut decided after a review last month to continue Maximus' contract and triple the amount it pays per child-care case. Welfare may be one of the few fields in which a system temporarily plagued by unpaid bills, unanswered phones and system breakdown can still constitute an improvement.