Editor’s Preview: For years, critics on the left and the right have claimed that the nation’s aid to the needy and unfortunate has made matters worse instead of better. Different reasons are advanced, but here one leading businessman sweeps all arguments aside to ask, “Okay, but what should we do about it?”
Judson Bemis’s solution, the delivery of human services by for-profit organizations, is innovative and persuasive. He points out that non-profit and volunteer organizations can learn a great deal from successful businesses and, by changing their methods, could offer more and better services. This presentation was originally delivered during the November 1987 Center for Constructive Alternatives (CCA) seminar, “Public Good and Private Lives: Voluntarism in America.”
Voluntarism and the non-profit sector are still potent forces in America. Much of the fruits of modern life may be attributed to the generosity and drive of millions of volunteers, philanthropists, and non-profit representatives. What I hope to convey here, however, is an expanded sense of what is possible—a third alternative beyond the use of government employees or non-profits to deliver human services—a way to bring human services into the mainstream of the American economy.
But first, some hard truths. The costs of providing human services are rising, just as the demand is escalating. Every day, more and more people are hurting, and new types of services are needed. From 1981 to 1984, 60 percent of the nation’s county systems increased their number of human services programs. Seventy-five percent increased the number of people served. At the same time, there’s less money available. In 1981, for example, the Reagan administration reduced federal spending for human services-related non-profit activity by $26 billion. Even though the pool of philanthropic dollars available to make up the difference has increased, inflation has meant a net loss and has led to even greater competition among all charitable and voluntary causes soliciting contributions.
Our economy is being whipsawed by increasing demands placed upon the social welfare system and its own decreasing ability to afford the bill. Government statistics suggest that when cash and in-kind payments are taken into account, we are supporting one out of every four people in this country. Yet a national Los Angeles Times survey indicates that roughly 70 percent of the American populace believes that tax revenues used to support human services are not being expended effectively.
A Third Alternative
What to do? First, we must shed some old assumptions. It simply isn’t true that human services can be delivered only by government employees or nonprofits. There’s a third alternative, another way of doing things, without reducing quality, excluding the needy, or escalating costs.
For decades, we have assumed that solving the plight of needy Americans lies in an endless, one-way flow of resources. Thus unemployment, crime, drug abuse, poverty, and mental illness have all consumed billions of public and private dollars. But what would happen if we were to change our expectations—if we could learn to see human services as business opportunities? What if we could transform resource-users into resource-producers? Is it possible to think and act as entrepreneurs in the human services sector?
I think so. I think the delivery of human services can be viewed in terms that makes such services susceptible to a market approach, with measurable returns in a reasonable amount of time, without reducing quality. I’m not proposing we change the objective: We’re still determined to provide quality services for the disadvantaged. But I am suggesting we look at new methods—and it’s already starting to happen.
In the last few years, more than two hundred small businesses have been launched by human services entrepreneurs.
Numerous non-profits have converted to for-profit status or have opened for-profit subsidiaries. Dozens of local and state governments have been issuing contracts to for-profit human services companies.
Why the shift to the for-profit alternative? Because government agencies are under increasing financial pressure, because non-profits are being squeezed by diminishing sources of funds, and because human services entrepreneurs are finding ways to merge profit motives with moral imperatives. For many of them, in fact, profits are not the principal objective. If they were, such entrepreneurs would probably pick an easier business. No, for them, the for-profit approach is a tool, the best possible tool, for extending their services to more and more people.
Now, it shouldn’t be surprising to see for-profit vendors delivering human services. After all, more than one hundred municipal services are today performed by contract: snow removal, waste disposal, fire protection, and recreation included. At every level, governments are still deciding which services to provide, but many of them no longer produce and deliver them through public employees. And this same strategy in human services gives public officials another way to leverage their limited resources, to save money or to spend it smarter without relinquishing responsibility for assessing local needs, setting standards and monitoring performance.
Better and Increased Human Services
As a result, government contractors, entrepreneurs, non-profit profesionals and social workers are all probing to better understand the for-profit approach. Let me offer just a few examples of the kinds of human services companies that have appeared in recent years:
Nine years ago in Miami, a minister and one member of his congregation began providing hospice care to a single dying patient in the basement of their church. Gradually the effort grew. Hospice Care, Inc. became a non-profit organization and its staff didn’t take a salary for more than two years.
In order to get into the HCI program, a physician must certify that the patient has six months or less to live, Hospice care is palliative, not curative can, and therefore goes against the tradition of aggressive treatment procedures employed by most hospitals. Under the HCI program, the entire family is treated, not just the afflicted member. And 80 percent of each patient’s care takes place in his or her home. The company also supports Hospice Houses that serve as interim stations between the hospital and the home or to give the patient’s family respite for a day or so.
In 1982, HCI’s founders sat in the church basement and discussed ways in which this kind of care could be offered nationwide. Two principles were agreed upon: They needed to become a for-profit company in order to acquire venture capital for expansion, and they needed national legislation that would allow Medicare reimbursement. Everybody told them that they were crazy to think they could get the legislation. In the following session of Congress, four thousand health care bills were introduced; one was passed. It was HCI’s bill. Today, Hospice Care, Inc. has more than 130 employees in three states, annual revenues of more than $6 million and is saving the federal government $15,000 per patient.
Three years ago, in Massachusetts, Peter Cove founded a company called America Works, basing it on a subsidized non-profit model. America Works trains and places welfare recipients in permanent jobs in the private sector. As you may know, 91 percent of the welfare recipients in this country are women who are single heads of households. In one state, the average America Works program beneficiary has several children and lives on an income of $300 a month, often in a dwelling without adequate heat or light. During the first year of operations in that state, America Works removed 430 people from the welfare rolls. Two-thirds of the company’s revenue comes from government agencies; one-third from companies that employ the trained graduates. The companies have a “try before you buy” option. The welfare recipients remain employees of America Works for as long as five months until employers are satisfied they’ll work out; only then are they transferred to the payrolls of the companies.
One of the interesting things about America Works is that some of the money it receives from the government is diverted from “workfare” programs, AFDC and the like. The government may not be saving money, but it is diverting dollars to a program that leads people towards self-sufficiency and eventually off the welfare rolls instead of maintaining them in a state of dependency. It takes about $4,800 in new government spending to put one person through the America Works program. This amount is returned to the state in eight months because AFDC payments, Medicaid, food stamps and other assistance are no longer necessary. After that, the state receives a return of 750 percent on its investment every year for each person who comes through the program.
Seven years ago, eleven people left the Chrysler Learning Center in Detroit to begin providing customized job training for the economically disadvantaged. CareerWorks now has regional training centers in twelve cities around the nation providing job skills in more than 35 categories. Graduates include clerical workers, robotics technicians, bank tellers, security guards, and mechanical drafters. Twelve thousand people have been placed by CareerWorks during the past five years, saving the federal government more than $46 million in transfer payments.
Thirteen years ago three corrections officials, frustrated with the system, quit their jobs and convinced a juvenile court judge to entrust them with five multiple offenders. Today, VisionQuest National, Ltd. has 550 employees, contracts with social service officials in 17 states, and generates annual revenues of more than $20 million. VisionQuest runs twelve camping programs, including: Wagon Trains, Tall Ships, Wilderness Journeys, and Bicycling. Students remain in the program for more than a year and, despite recent controversy over the program’s effectiveness, the Rand Corporation has done a study that shows VisionQuest’s recidivism rate is at least as good as the rate for lockup facilities and costs the taxpayers far less.
A Minnesota company, Human Resource Associates, has a wide range of human service offerings including employee advisory programs, chemical dependency counseling, and mental health treatment for adults. Especially interesting is their day treatment center for emotionally troubled teenagers. Those who are unable to get into the center are sent to a residential facility in northern Minnesota, removed from the community in which they are going to have to cope eventually, and from their friends, their school and their family. It costs the state $80 a day to keep them there. Human Resource Associates is able to take those same youths in a quarter of the time and at half the cost, to return better results according to their county’s own measurements, and to keep them in the community during the entire process. It’s a model that could fit in every community in the nation.
According to the Michigan State Department of Education, more than 60 percent of Detroit’s teenagers are high school dropouts. In Illinois, Chicago alone loses 53 percent. In Washington, 30 percent of the students who start ninth grade will not finish high school. In Oregon, the figure is 32 percent.
Educational Clinics, Inc. is a company that provides remedial training for high school dropouts in Washington and in California. These are 15-19 year-olds, for the most part tough kids with tough problems — kids from low income, single parent families. Many of them have been physically or sexually abused. After a three month stay in the ECI program, according to an independent follow-up study conducted three years later, 75 percent of the students had either gone back to school or received a graduate equivalent degree, and they were half as likely as the dropouts who hadn’t gone through the program to wind up in the criminal rolls. In addition, of high school dropouts who now hold full-time jobs, those trained originally by ECI were earning, on average, five years later, $2,100 more per year than their counterparts. They were also paying an average of $568 in additional taxes every year. More than 4,500 students have been trained by ECI thus far and the company’s program has been so successful that legislators in both California and Washington have enacted laws to permit the use of public funds for tuition.
These are only a few examples. Entrepreneurs have started other small businesses in areas such as home care for the elderly and disabled, placement programs for unwanted children, alternative sentencing for the criminal justice system, curative programs for substance abusers. And still others have started companies that employ the disadvantaged. In Minnesota, a company reserves half its jobs for ex-prisoners; in Wisconsin, a company employs people with mental handicaps; in Kansas, a company employs current prisoners outside the walls.
An End to the “Either/or” Approach
At the Alpha Center for Public/Private Initiatives, which I serve as chairman, we have broken the human services industry down into 53 categories and sub-categories of need. We have found small companies working in each area.
Some of the new companies are former non-profits; some are subsidiaries of non-profits; many are independent ventures started by individuals who had been government, corporate, or non-profit workers. And all of them are self-sufficient organizations that serve the disadvantaged without depending on philanthropy or public sector subsidy. They may receive fees from the public sector for services rendered, but they no longer depend on grants or seed money for their operations.
The benefits of this new approach, the third alternative, fall into at least five categories: First: Investment capital has made it possible to take something that works and deliver it to more and more people faster than ever before. Entrepreneurs don’t have to wait for charity or government subsidy before they can attract loans or sell equity in order to start a new venture or to introduce a successful model into another city or county. As a result, more people are being served sooner.
Second: Working for a business gives entrepreneurs and their employees a personal financial stake in the success or failure of the enterprise. Typically, government and non-profit employees receive a flat salary. There is no financial incentive to do more or better and, correspondingly, there is no financial penalty for doing less or worse. In a small business, however, there is a carrot and a stick; careers rise or fall with the success or failure of the company, and innovation becomes a way of life.
Third: By successfully exploring for-profit alternatives, either through conversion to for-profit status or the development of for-profit subsidiaries, non-profits may increase their self-sufficiency, reducing their dependency on philanthropy or government subsidy and stabilizing their sources of revenue. While some organizations act only because they are in a crisis situation, others do so because they have proven programs that could be delivered to more people if sufficient expertise and capital were available.
Fourth: Contracting with for-profit vendors has enabled government agencies to leverage their limited financial and labor resources without (and this is very important) relinquishing responsibility for setting standards and monitoring performance. Agencies contracting human services have saved money, improved service quality, made services available to more people, limited the size of local government, and increased the managerial capabilities of in-house staffs.
Fifth: The for-profit approach has given foundations and corporate grant makers another way to make the best use of their funds. By helping some recipients achieve self-sufficiency, they have been able to be redirect resources to other groups in subsequent years.
To skeptics, all the positive examples in the world will not make the third alternative palatable. Many of them believe it is just not possible to mix compassion with profits, that the profit motive means quality will suffer, and that people who really need the services won’t be able to afford them. They also believe it’s simply illegitimate to make money “off the backs of the poor.”
I find these doubts fundamentally puzzling. It is not illegitimate to put soup in a can and sell it in a grocery store; for carpenters to charge a fee for building a house; for a department store to put a price tag on a pair of jeans. Food, shelter, and clothing are all basic needs, yet we see nothing illegitimate in making money from their sale because we understand there is no such thing as a free lunch. Profits are necessary to keep the grocery stores, the carpenters, and the department stores in business. They are the source of new products, new jobs, new ways to provide services. Profits are no more the purpose of a business than breathing is the purpose of life. Breathing is a requirement of life.
As for concerns about quality and the truly needy, those objections can be met if government plays its proper role in the partnership — if a government agency writes a contract that addresses the issues head-on — a contract that’s properly structured and monitored. I can’t emphasize enough the importance of forging a partnership between the public and private sectors. And a tightly written contract, with proper government supervision, can also ease the fears of people who believe the entry of for-profit companies means government will lose control of human services delivery, that we will open the door to waste, fraud and abuse, or that costs will escalate dramatically.
Many questions to be answered. This third alternative for delivering human services is relatively new. But when it comes to choosing the best tool for serving more people, it really boils down to just three issues. The first is effectiveness. Does the service meet the needs of individual recipients, of the local community as a whole? The second is equity. Is the service available to those who need it most? Can they afford it? And the third is efficiency, or cost. How much output will be generated for each unit of input? There are no easy answers—but the goal is to find the most productive way to deliver the service: the most effective, equitable and efficient way to do it.
Everyone concerned with human services has the same objective in mind. What we are all searching for is the best combination of resources, the best of the non-profit world, the best of the for-profit world, the best of the public sector. There is more than enough room for all of us. We need to merge our resources to develop new tools, to find new ways of meeting our society’s needs. The human services entrepreneurs with whom we work at the Alpha Center are driven, as I have said, not by profits but by a desire to make their services available to more and more people. And for these men and women, the best way to do that is to tap into this country’s huge river of investment capital.
Philanthropy and government subsidy are simply not enough. The for-profit approach is not the best alternative in every case. Many times a non-profit has become so skilled in its delivery of services and is so self-sufficient, it would be foolish to choose another path. And sometimes it simply makes sense for a government agency to deliver services directly. But we all know the costs of providing human services are climbing and the demand is escalating every day. We need all the resources we can utilize. We need to break free of the “either/or” approach: either non-profits or government employees. We need to invent new mechanisms, new alternatives—because we’re all trying to find the best way to deliver more effective services to more and more people.