Critics of privatization say failed Indiana-IBM deal should be warning to other states

Critics: Failed Indiana-IBM deal can warn others

INDIANAPOLIS — Indiana said it was going to get outsourcing right when it turned welfare eligibility services over to a private contractor in 2007. Now critics say the failed move is the latest warning that states should not allow for-profit companies to run social services.

The ambitious, $1.34 billion effort to automate applications for food stamps, Medicaid and other welfare benefits was being closely watched after states such as Texas had problems when they tried similar plans.

Indiana fired IBM Corp. as the lead contractor on the project Thursday over problems including lost documents, delays in benefit approvals and poor service.

“Other states should beware,” said Jim Wallihan, an advocate for senior citizens in Indiana. “Indiana’s been a good demonstration, along with Texas, that there’s some variables involved that just don’t take well to privatization.”

From the beginning, officials said Indiana had learned from the experiences of other states and was confident it had a better approach. But its contract with IBM quickly led to a long list of complaints.

Gov. Mitch Daniels, a privatization supporter who leased the Indiana Toll Road and proposed outsourcing the Hoosier Lottery, said IBM didn’t make enough progress to fix poor service. Indiana will retain other private contractors as it works to create a new hybrid welfare eligibility system.

IBM has said it believed it was making progress and that high unemployment led to more demands on the welfare system, making the changes more difficult.

Daniels said the decision to cut ties with IBM is a reflection on the company’s specific plan, not of the merits of privatization.

“It has nothing to do with private or public,” Daniels said Thursday. “It had to do with a concept. If you’ve had tried to use the same concept IBM brought, and every worker was a state worker, you’d have had exactly the same results, or worse.”

Both Indiana and Texas — where thousands of children lost health insurance because of problems from an outsourcing experiment that ended in 2007 — learned a costly lesson, said Celia Hagert, a senior policy analyst at the Center for Public Policy Priorities in Texas.

Yet more states could still consider privatization — touted as a way to save money — as they search for budget cuts during the economic downturn, she said.

“These two huge and costly errors in Texas and Indiana should give any state pause when it thinks that privatization is going to save them money, because it’s not,” Hagert said. “It causes a lot of damage.”

That won’t stop states from turning to privatization as a way to cut costs in the future, predicted Dru Stevenson, a professor at the South Texas College of Law who opposes the practice.

“States will continue to fall for this and it will continue to backfire,” he said.

But Michael Kerr, senior director of state and local issues for the industry group TechAmerica, said private companies can give states better data, more predictable spending, additional skills and more manageable infrastructure while eliminating waste and fraud.

“It’s just a question of finding the right mix of technology and delivery and cultural change and such that would enable some of these larger projects to work well,” he said.

While Indiana has cut out IBM, it’s keeping other companies, which will now work directly for the state’s Family and Social Services Administration.

“The state may be taking a more direct managerial role, but I don’t see very much being different despite the fanfare,” said Stacy Dean, director of food stamp policy for the Center on Budget and Policy Priorities, a Washington-based think tank and advocate for low-income people.

The FSSA will develop a detailed plan by Dec. 14 for a new hybrid welfare system that Daniels said will incorporate successful elements of Indiana’s old, face-to-face process along with the call centers, document imaging and other automation IBM and its partners introduced.

That was little consolation to Rene Fuller, a case manager at a women’s shelter in Anderson who has helped residents there contend with lost documents and other problems in the new system.

“I have a fear that it’s going to get worse before they can make any improvements,” Fuller said. “We’re kind of holding our breath, to be quite honest with you.”

Associated Press Writer Mike Smith contributed to this report.