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chapter CHAPTER 7 DESIGNING AN OUTCOME-FOCUSED CONTRACT In the long run, men hit only what they aim at. - Henry David Thoreau Public works departments and other "hard" services have used
performance-based contracts for years to ensure that private contractors
fulfill certain public functions: for example, roads are paved, buildings
and grounds are maintained, or bus service is provided (Savas, 1987). For
these types of services, it is relatively easy to write contracts with performance
standards for service quality (grade of asphalt used, building cleanliness,
bus drivers' on-time record), as well as for desired outputs and outcomes
(miles of paved road, number of buildings properly maintained, number of
passengers carried). Government agencies use these standards to monitor
contract compliance and decide whether to award bonuses or assess penalties
for contractor performance. Performance-based contracts have been used much less frequently in the
"soft" area of human services due to the difficulty of specifying
desired outcomes and because until recently there was no public or government
pressure for human service contractors to demonstrate results (DeHoog, 1984).
Performance standards in human services contracts typically have addressed
the quality of the service (staff/client ratios, staff credentials, timeliness
of response) and the level of effort exerted to provide services (number
of workshops conducted, number of calls answered, hours of treatment). Under
this type of performance contracting, human service agencies often expend
a lot of effort micromanaging contractors' operations-specifying in great
detail how they should provide services, then checking to see that
they do. Yet, because they do not track outcomes, no one can tell whether
the services really had positive effects on people's lives. Fortunately, child support enforcement, unlike many human services, has
a number of measurable outputs and outcomes that can be specified in a contract.
Many of these were identified during the pilot of the Government Performance
and Results Act by the federal Office of Child Support Enforcement. The bottom line, of course, for child support privatization contracts
in general is increased collections. Many intermediate outcomes that contribute
to this overall outcome can also be tracked-for example, the rate of paternity
establishment, the percentage of the caseload with support orders, and the
percentage of parents with support orders who pay support. Performance-based
contracts can be developed that focus on even finer levels of outcomes within
each of these areas, such as the percentage of non-custodial parents located
or the amount of collections obtained through wage withholding. This chapter discusses four contracting issues of concern to the Title
IV-D agency and its contractors:
Step 8: Design a Performance-based Contract to Improve Outcomes SELECTING PERFORMANCE MEASURES The key to managing a contract-and, perhaps more importantly, to developing
a successful partnership with the contractor-is to have a system for measuring
results (Brizius and Campbell, 1991).
With outcome and performance data in hand, the contract manager and the
contractor can jointly determine how well the privatized operation is working
and pinpoint areas that need improvement. Part of the contract negotiations
should include deciding which outcomes will be tracked, how they will be
measured, and how frequently the results will be reviewed. Most government programs that have established outcome and performance
measurement systems have tried to incorporate the five types of information
recommended by the Governmental Accounting Standards Board (GASB,
1990). These are:
In addition to these five recommended types of information, performance
measurement systems also frequently track and report another type of indicator:
By requiring contractors to report these six types of information, contract
monitors can determine what the contractor is accomplishing, how efficiently
it is done, how cost-effective the service is, and what factors affect efficiency,
costs, and performance. Performance Indicators for
Child Support Enforcement Services Primary Performance Measures Table 7-1 lists the primary performance measures needed to indicate how
well a local child support enforcement program is working. These are the
"bottom-line" indicators that can be used to judge and compare
both privatized and publicly operated child support programs. Most of these
measures are already used by Title IV-D agencies and the federal government
to gauge program performance at the state and local levels. In addition,
most are also included in the set of performance measures recommended by
the Office of Child Support Enforcement's state-federal workgroup on performance
measures. In the performance measurement arena, true program outcomes-that is, the real changes in people's lives-are seldom measured directly due to the difficulty and expense involved in gathering such data. Child support enforcement is no exception. Rather than directly measure the outcomes for non-custodial parents, custodial parents, and children, the outcome indicators in Table 7-1 are proxy measures for the real thing. It is assumed that if these rates improve more children will have "regular, uninterrupted financial and medical support" throughout their youth. Table 7-1 PRIMARY PERFORMANCE MEASURES FOR CHILD SUPPORT PROGRAMS
aMeasures recommended by the federal Office of Child Support Enforcement's
performance measures workgroup When looking at the contractor's bottom-line performance-usually
on an annual or quarterly basis-it is not necessary to examine process or
output indicators. Outcome and overall cost-effectiveness indicators are
sufficient to tell whether the contractor is doing a poor, adequate, or
better than average job. In reporting these results, however, the contractor
should include some explanatory information regarding the level of performance,
particularly if it is below average. The contractor should briefly describe
the factors that have inhibited performance, note which ones are within
the contractor's control to correct, and advance a plan for overcoming these
obstacles. Performance Measures for Five Service Components Table 7-2 lists input, process, output, and (mostly
intermediate) outcome measures for the five service components discussed
previously: intake/locate, establishment, enforcement, collection, and disbursement.
The Title IV-D agency could use these measures to examine a contractor's
performance and quality of service in greater detail than is possible just
using the primary performance measures presented in Table 7-1. The purpose of collecting this information is twofold.
First, much of it is already required for federal reporting. This is particularly
true of the many process indicators. The second reason for collecting (or
having the contractor report) this information is to help troubleshoot problems
and promote continuous improvement. By jointly reviewing program performance
on a quarterly or monthly basis using these indicators, the contract manager
and contractor can catch problems early, identify potential solutions, and
ensure that the program is moving in the right direction. As with the primary
indicators, the main focus should be on the outcomes for each component
rather than on the process or output measures. Table 7-2 does not include efficiency indicators. These are usually expressed as a ratio of outputs to inputs (resources); for example, the average number of non-custodial parents located per locator staff position each month or the average amount of collections per agent. Efficiency indicators can be easily calculated once the amount of staff resources for each component is known. In general, however, this information is more useful to the contractor for managing the program than to the Title IV-D agency for overseeing the contract. In a privatized system, the agency should be able to focus on the outcomes and let the contractor worry about the details. PERFORMANCE MEASURES FOR
aMeasures currently used to determine compliance with federal standards bMeasures recommended by the federal Office of Child Support Enforcement's performance measures workgroup System Outcomes In addition to delivering services, contractors
must also do a number of other things to ensure that services are delivered
efficiently and effectively. These include organizing the office, hiring
and training staff, upgrading automated systems, and developing cooperative
relationships with partnering agencies. Early in the contract, the contractor
will probably expend a lot of time and resources on these functions, which
do not have an immediate payoff in service productivity but will produce
benefits later. It is usually sufficient to have the contractor indicate
progress on these activities through monthly or quarterly narrative reports. For some high-priority areas-such as hiring staff,
training, and automation-the Title IV-D agency may want the contractor to
develop implementation plans with measurable goals or deliverables. The
plans should be sufficiently detailed so the agency can monitor progress.
Outcome indicators for these plans might include measures such as the percentage
of staff trained by a certain date, the number of automated case records
converted to a new format, or the percentage of personal computers linked
to a local area network. At a minimum, the following elements should be
considered for inclusion in the performance measurement system:
Objectives
of a Payment and Incentive System for Child Support Enforcement The payment and incentive system should be designed
to achieve three objectives. First, the system should promote an overall
increase in the outcomes of interest-for example, collections. Second, the
system should motivate the contractor to increase performance on critical
factors that affect the outcome (parent locations, wage withholding orders,
etc.) and for which the federal government holds the state accountable (number
of days to locate, etc.). Third, the system should prompt the contractor
to provide high-quality services at a reasonable cost to the state. Using
the performance measures described in the previous section, Title IV-D agency
can determine whether the contractor achieves these objectives. In addition, the payment and incentive system should
be designed so that it is-
How States
Have Structured Payments and Incentives Contracts privatizing child support enforcement
are seldom like other human services contracts, which are usually fixed-fee
or cost-reimbursement contracts. Typical child support enforcement contracts
for collections and for full-service privatization use a contingency fee
mechanism in which the contractor is paid a percentage of total child support
collections. Of the 20 full-service contracts we reviewed from eleven states,
14 used this method to reimburse contractors. The prevalence of this payment
mechanism may owe to the fact that many of the initial efforts to privatize
child support services focused on the collection of arrearages. Most firms
that received these collections contracts work on a contingency fee basis.
Over time, contractors added other child support enforcement functions,
but the basic payment model remained unchanged. Table 7-3 summarizes the payment terms for the
full-service contracts we reviewed. Three of the states (six contracts)
do not use the percentage-of-collections method of payment. Oklahoma uses
a standard cost-reimbursement type contract because the contractors-two
community action agencies-are prohibited as tax-exempt organizations from
earning a profit. Wyoming has one contract in a rural district that is a
fixed-fee contract that also offers the contractor an 8 percent bonus for
all collections above a certain target. The three contracts in Arkansas
are unique in that they are fixed-fee contracts that also offer a package
of incentives for exceeding performance targets in a number of enforcement
areas. Each of these payment and incentive models are discussed in detail
in the following sections. Percentage-of-Collections
Models Basic Model Conceptually and administratively, this model is the simplest because it focuses almost exclusively on the main indicator of program outcome-collections. Beyond requiring contractors to comply with federal performance standards for timeliness and appropriate action on cases, Title IV-D agencies using this method generally have not embellished their contracts with additional incentives or bonuses. They do not, for example, pay more for improvements in intermediate outcomes such as the establishment of support orders, paternity establishments, or improved customer service. The logic behind this approach is that in order to improve the collection rate and make more profit the contractor will improve performance on these intermediate outcomes anyway. Thus, the contractor is rewarded for producing the ultimate result, not for taking the steps necessary to get there. Table 7-3 PAYMENT TERMS FOR FULL-PRIVATIZATION CONTRACTS (Annual Percentage-of-Collections
Rate Unless Noted)
aState performs payment processing bNPA cases only cPilot program; rate capped by pre-privatization cost per dollar collected dVendor able to negotiate high rate due to lack of competition in bidding process eRate reduced 1 percentage point for each $500,000 below annual collections goal The percentage payment amount for the contract
is established through the RFP process. The bidder is usually required to
indicate the percentage of reimbursement sought for each contract year.
The percentage can be the same from year to year or variable. An exception
is Mississippi, which used a fixed fee for the first 15 months of the contract
before switching to a straight percentage-of-collections payment method.
The bidder with the lowest overall percentage generally wins the contract.
As shown in Table 7-3, the average first-year reimbursement
percentage is around 15 to 16 percent when the extremely high and low contract
percentages are excluded from the calculation. The average percentage for
the final contract year is around 13 percent. Generally, the contracts for
rural areas (Arizona, Wyoming, and all but District 20 in Tennessee) have
higher reimbursement percentage rates than in the more urban areas. This
is due to economies of scale that can be achieved in the larger districts.
The exception to this trend is found in the two Maryland contracts, where
the maximum payment level is capped by legislation to prevent the costs
of privatized services from exceeding the cost per dollar collected when
services were provided by public employees. Since the rural office had been
more cost-effective than the urban office, the reimbursement rate was capped
at a lower level. Contract Length Most percentage-of-collections contracts for full
privatization are for five years including two or three one-year renewal
options. Due to the typically high start-up costs for these programs, the
minimum contract length preferred by private contractors is three years.
This helps ensure that the contractor will make a profit over the life of
the contract, if not during the first year or two. It is also typical for
contractors to receive a higher percentage rate on collections during the
first year of the contract and for the reimbursement percentage to decline
over time. This arrangement helps the contractor defray start-up costs and,
in some instances, may ensure that the contractor remains solvent. Tennessee
initially let contracts in which the payment percentage was the same for
each year, but switched to a declining percentage rate in later contracts. Payment Payment under this type of contract is straightforward.
Each month the contractor reports to the state the total amount of child
support collected for all cases, and the state reimburses the contractor
at the current contract rate. Some contracts include a cap on the state's maximum
liability for payments to the contractor, which is often a requirement under
state procurement regulations. If a contractor is particularly productive,
the contract must be amended to allow payment for the extra collections. Nebraska has capped the amount it will pay for
non-public assistance (NPA) collections by tying reimbursement to the collection
amounts for public assistance (PA) cases. For every $5 collected for NPA
cases, the contractor must collect $1 for PA cases. If NPA collections exceed
PA collections by more than the 5:1 ratio, the contractor simply is not
paid for the additional NPA collections. The purpose of this provision is
to ensure that the contractor works the PA cases. The contractor has challenged
the provision as being antithetical to welfare reform and counterproductive
to program goals in the areas of paternity and support order establishment.
The contractor argues it is penalized for doing a good job in these areas
when the client leaves welfare as a result. Penalties Nearly all of the contracts include penalties in
the form of reimbursement reductions if the contractor is not in compliance
with federal case processing standards. These are monitored though semiannual
audits of a representative sample of cases. Most states require the contractor
to submit a corrective action plan within 30 to 60 days if an audit reveals
deficiencies. If the contractor fails to submit a plan on time, 10 percent
of each subsequent monthly payment is withheld until the plan is submitted.
Further penalties may accrue when the contractor fails to correct deficiencies
within the corrective action period (15 percent in the first month with
an additional 10 percent for each month the deficiencies persist). Some
states require contractors to pay a proportionate share of penalties assessed
against the state as a result of deficiencies found through federal audits.
Virginia, in addition to requiring compliance with
state and federal standards, also requires the contractor to maintain a
cost-effectiveness ratio of 1.25 to 1 (total annual collections for PA cases
to annual privatization contract costs). If the contractor fails to maintain
this ratio, a corrective action plan is required as described above with
the same penalties imposed if necessary. The contractor also gave the state
an unsolicited performance guarantee that total collections would increase
by a minimum of 10 percent for each year of the five-year contract. The
contractor promised to reduce its annual percentage fee by 1 percent for
each $500,000 it was below the targeted amount in a contract year. Maryland set minimum performance standards that
increase each contract year for the following outcomes: PA collections,
NPA collections, paternity establishment, cases with support orders, cases
in which support is paid, and the ratio of child support collected to support
due. (The state tracks performance in all other jurisdictions on these standards
as well.) Collection amounts are required to increase at least 10 percent
per year in the privatized jurisdictions for both PA and NPA cases. Failure
to meet any of the performance standards, which are monitored quarterly,
requires corrective action and the usual application of penalties if necessary.
The state has the option to refund some or all of an assessed penalty if
the contract has been brought into compliance. The states of Arkansas and Wyoming have contracted
for full privatization of child support enforcement services in small- to
medium-sized judicial districts through contracts that pay the contractor
a fixed fee plus incentive payments for exceeding certain performance targets. Wyoming The Wyoming model is the simpler of the two. A
small, locally based contractor operates a fully privatized child support
program in two sparsely populated rural districts in the state. Because
the contractor has relatively high costs associated with serving a caseload
of less than 6,000 in a large geographic area, the state pays the contractor
a fixed fee. In addition, the contractor can earn an 8 percent reimbursement
on any collections in excess of $2.5 million for the contract year. The contractor bills the state monthly and is subject
to the same types of penalties as described above for not meeting a 75 percent
compliance rate on federal standards for timeliness and appropriateness
of case actions. Arkansas The state has three full-service contracts in place
in which private contractors receive a fixed fee and are reimbursed for
100 percent of expenses up to a set amount. In an effort to improve performance
in all stages of enforcement, child support officials in Arkansas implemented
a payment system that includes a variety of outcome-based incentives and
performance bonuses. Contractors are able to earn incentives and bonuses
for the following:
The contractor reports monthly on the PA and NPA
collection amounts and the cost of service. Bonuses and incentives are calculated
each month based on these data and the state averages for that month for
the three cases marked with an asterisk above. Contractors are reimbursed
for their costs monthly and paid earned bonuses and incentives quarterly.
If a contractor is below the state average on any
of the cases with asterisks at the end of a quarter, a 1 percent reduction
on reimbursements is imposed for the next three months. This penalty is
not imposed if the contractor has shown an improvement of 3 percent or more
during the quarter on any indicators that were also below the state average
at the end of the previous quarter. Contractors must achieve a 75 percent compliance
rate on federal performance standards, as well as meeting standards for
delivering child support enforcement services "in a professional and
courteous manner which demonstrates sensitivity to customers and the public."
The state uses a combination of contractor- and state-maintained complaint
and resolution logs, case records, and client survey instruments to assess
the quality of customer service. Unlike the 10 percent and 15 percent reimbursement
penalties other states assess for being out of compliance, Arkansas does
not assess penalties. The contractor must, however, submit a corrective
action plan within 15 days and demonstrate substantial improvements within
nine months or the contract is terminated. Advantages
and Disadvantages of Various Payment Models Each of the payment and incentive models described above has advantages and disadvantages that should be considered carefully when developing a payment system for a full-service contract. Table 7-4 summarizes the pros and cons for each model from the perspective of the Title IV-D agency. Table 7-4 ADVANTAGES AND DISADVANTAGES OF
CURRENT PAYMENT MODELS
In deciding on a payment and incentive system for
a contract, the Title IV-D agency is determining the degree of financial
risk it will assume and the how much will be borne by the contractor. A
contingency-based contract in which payment is tied solely to performance
is quite risky for a contractor. The firm can lose a lot of money-or it
can reap windfall profits. Either way there are elements of risk to the
Title IV-D agency as well. If the contractor is losing money, it probably
means that service quality is suffering, results are below par, and the
agency will soon be looking for a new contractor. If the contractor makes
a considerable profit, the agency is accused by privatization opponents
of wasting taxpayer money or "giving away the store." Contractors in our focus groups pointed out other
financial risks that are built into some current contingency-based contracts:
Mixed Model Under this model, core child support enforcement services are reimbursed on a contingency basis. Payment for other functions, such as case conversions or establishing a job referral program, are based on a fixed-fee contract or other negotiated agreement that can be amended or adjusted as the scope of work becomes more clearly defined. Multiple Contingency Fees The Title IV-D agency and the contractor negotiate one contingency fee for "regular" cases and a higher fee for cases that require significantly more effort to work. This approach helps reduce risk when there are no reliable statistics to predict the mix of cases the contractor will receive. It also provides an incentive for the contractor to tackle harder cases and helps prevent "creaming." Partial Cost Reimbursement Plus Incentives In this model, the contractor is paid a portion
of its costs, say 80 percent, and an additional incentive payment based
on results obtained. This way, the contractor is assured of recouping most
of its costs and is motivated to perform as well as possible. Fixed Contingency Fee Plus Competitive Incentives This model is applicable to services such as collections
when there are two or three providers under contract and work can be distributed
among them equally (same mix of NPA and PA cases, equivalent amount of arrearages,
etc.). The Title IV-D agency sets a fixed contingency fee-for example, 25
percent for a collections contract-that is paid to all contractors. The
top performer each quarter receives a 2 percentage point bonus, and the
second-place performer a 1 percent bonus. This method uses competition among
providers to spur superior performance rather than tying incentives to performance
targets. Finally, regardless of the model considered, contractors
in the focus group agreed that incentives work better than penalties in
motivating private sector firms to excel. Contracting
and Federal Incentive Funding In designing a payment and incentive system, the
Title IV-D agency must take into account the impending changes in the federal
incentive funding formulas for child support enforcement. The welfare reform
act required the Secretary of Health and Human Services, in consultation
with the directors of the state child support enforcement programs, to recommend
to Congress a new incentive funding system to be based on program performance.
In February 1997, an incentive funding work group composed of federal and
state officials recommended that the current incentive system be modified
to provide incentive payments to states based upon state performance on
five measures (U.S. Department of Health and Human Services, 1997). The
recommended measures are:
Under the proposed plan, each state will receive
a separate incentive payment for each of the five measures that meets or
exceeds a minimum standard, with better performance netting larger payments.
The state can receive a maximum incentive payment for each measure of either
.75 percent or 1 percent of its child support collections depending on the
particular measure. Unlike the current incentive system, the state can count
all of its collections for NPA cases when computing its "collections
base" for calculating these incentives. The plan, however, recommends
that collections for current and former PA cases be given twice the weight
of NPA collections when the collections base is computed. In this way, states
still have a strong incentive to work PA cases. In light of these proposed changes, which could
take effect in fiscal year 2000, Title IV-D directors will want to ensure
that privatization contracts produce results that help the state earn incentive
payments. They should consider setting performance standards for outcomes
related to the five proposed measures as Maryland did for its full-service
pilots. USING THE
CONTRACT TO BALANCE RISKS Public officials are often reluctant to contract
out a service for fear that the contractor will fail to perform adequately
or will fail completely, resulting in an interruption of service. One method
of reducing public risk is to include provisions in the contract that shift
the risk of failure to the contractor. Title IV-D agencies have employed
a variety of commonly used contract provisions to reduce their risk as well
as creating some special provisions unique to child support enforcement.
Specific provisions can be added to the contract
to guarantee performance or to protect the agency against changes in circumstances
after the contract is signed:
Special Provisions
of Child Support Enforcement Contracts
While these contract provisions can protect the
agency financially, they may do little to improve the quality of service
while the provider is still under contract or to prevent an interruption
of service. In addition, such protections make the contract potentially
less profitable for the contractor, drive up costs, and sometimes prevent
qualified providers from bidding. The use of these provisions should be
well thought through and fit the circumstances and anticipated risk of failure.
Rehfuss (1989) observes, "Picturing a contract with all these provisions
stretches the imagination. Such a contract would certainly cost more than
if the agency itself provided the service." Balancing
the Risk for the Contractor If the goal of privatizing child support services
is to create a public-private partnership to better serve the customer,
then a contract that attempts to place all the risk on the contractor provides
a weak foundation for the relationship. The Title IV-D agency can take several
steps to reduce contractor risk to an acceptable level and promote a true
partnership: Define and fulfill responsibilities. In developing the RFP, the Title IV-D agency has identified
the responsibilities of the contractor, the agency, and the partnering agencies
and organizations. The agency must ensure that all parties fulfill their
responsibilities. For example, if the agency has promised to train contractor
staff on policies and procedures or to provide certain facilities or equipment
for contractor use, it must make good on its promises as scheduled. Similarly,
if the contract states that the clerk of courts will process documents submitted
by the contractor and the sheriff's office will serve warrants-and if the
Title IV-D agency has cooperative reimbursement agreements with these agencies
to perform the functions-then the agency must hold these partnering agencies
accountable for fulfilling their duties. The agency should make their contracts
performance-based as well. For agencies not under contract, the Title IV-D
agency should use memoranda of agreement, facilitate meetings between these
agencies and the contractor, jawbone, or take other actions to help ensure
that they work cooperatively with the contractor. Guarantee a minimum workload for the contractor. Without abrogating its right to adjust the service level
in response to changing circumstances, the Title IV-D agency should specify
in the contract the minimum workload the contractor should reasonably expect
to receive. It should also describe the steps it will take to ensure that
other agencies, such as the local social service office, make necessary
referrals so that the minimum workload is met. If it becomes necessary to
reduce or increase the workload substantially, the time frames for notifying
the contractor of impending changes and the options available to the contractor
for renegotiating or modifying the contract should be clearly spelled out. Allow for renegotiation if information in the
RFP proves inaccurate. Set a tolerance
level-for example, that the caseload estimates in the RFP will vary no more
than 15 to 20 percent from the actual caseload to be worked by the contractor-and
allow a contract modification if this level is exceeded. Also allow for
modifications if the actual level of effort to perform certain tasks, such
as case clean up and data conversion, exceed the levels estimated in the
RFP by a certain amount. Be willing to negotiate quality standards. With the exception of state and federal performance standards,
the Title IV-D agency should entertain proposals from the contractor on
how high to set other quality standards: telephone response time, data accuracy,
etc. One approach is to require the contractor to include a quality assurance
plan in its technical response to the RFP that describes the quality standards
the contractor proposes to achieve. During contract negotiations, the proposed
standards can be adjusted if necessary. Alternatively, bidders can be asked
to propose costs for different performance levels. Specify how disputes will be resolved. State procurement regulations usually govern the resolution
of disputes between the contractor and the contracting agency. However,
the process should be clearly specified in the contract or RFP document
so that both parties know what to expect if they cannot reach agreement.
Ideally, the process is conducted by a neutral party and streamlined. DEVELOPING
CONTINGENCY SERVICE PLANS In addition to using contract provisions to protect
itself and its clients, the Title IV-D agency may also need to develop backup
service capability. According to Rehfuss
(1989), public agencies can use the following
methods to prevent or reduce service disruption in case of a contractor
failure or other emergency:
As with the protective contract provisions, each
option has its costs. Each also requires foresight and planning and must
be arranged well in advance of any potential service disruption. |
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