Wednesday, August 10, 2005

Maximus problems show privatization risks

VICTORIA - You should be concerned that the private company hired to take over MSP and Pharmacare administration is already running into problems.
Maximus Inc. got the contract last year, a deal that will see the government pay the U.S. company $320 million over 10 years.
Now news has leaked out that the government has imposed penalties under the contract, because Maximus wasn’t coming close to meeting performance targets. The contract says calls should be answered in three minutes. People are waiting five times that long. New applications are supposed to processed in 20 days; more than a third took longer than 40 days. The good news is that the contract has penalty clauses, and the government has used them. (The amounts are secret, says Health Minister George Abbott. Apparently Maximus didn’t want the information known, and the government agreed to the secrecy.)
The bad news is that things have gone wrong so soon after the company’s April 1 take-over. The penalties involve service failures in April and June, when you would have expected Maximus to be pushing to show what good job it could do.
Some start-up pains are normal, the load has been heavier than expected and service was not great when the work was done in-house. Maximus says it will hire up to 40 extra people to clear the backlog, and Abbott is confident things will get better.
There is merit to the argument that it makes sense to contract out some work to specialized companies. They can spread the costs of developing computer systems over different clients, and - theoretically - become experts in the field.
The Liberal government has been keen on the idea, signing more than $1.5 billion worth of deals to contract out work once done by government employees, with more to come. They maintain the work will be done better, and cheaper.
The Maximus problems are a useful warning that things do not necessarily work out as planned. And the potential consequences are worrying.
Penalties are useful short-term weapons, and Maximus is no doubt keen to protect its reputation (despite, or perhaps because of, problems in other jurisdictions).
But ultimately the corporation needs to make money on this deal. Maximus took in $725 million last year, and made $48 million in profit. The B.C. contract is a significant piece of business for the corporation.
If penalties hurt the profitability of the B.C. operations, or the extra staff needed to meet the commitments cost too much, managers will be expected to fix the business problem. Since revenue is limited by the contract, the only option is to cut costs. (I speak from experience as a former corporate guy.)
And while the 27 performance standards in the contract are intended to protect service levels, operators will find shortcuts not covered by the contract.
When it comes to this deal, that's an acceptable risk. Even if there are problems, the consequences are manageable.
But that's not true for all contracting out efforts.
Take the BC NurseLine service, currently slated for privatization, with Maximus considered the front-runner to win the $135-million, 10-year contract.
The NurseLine is valuable. Nurses are available around-the-clock on a toll-free line to answer health questions. They can reassure a worried parent, promote prevention and head off unnecessary emergency room visits. It provides better, cheaper healthy care, fielding about 700 calls a day.
The service has been managed by E-Comm, the non-profit agency that provides 911 services in southwestern B.C. Abbott says E-Comm turned down a government offer to continue the service, leading to the privatization plan.
But the consequences of performance problems are much more serious with NurseLine, and many other services. A corporate operator under pressure to cut costs could compromise the line's value in fundamental ways.
Privatization often makes sense. But not always.
And given the sensitivity of the issues with NurseLine and the problems with the existing Maximus contract, it's hard to see why the government is prepared to sign a 10-year contract with a private operator.
Footnote: It's puzzling that the government hasn't worked harder to expand NurseLine's use. Emergency rooms could all have phone banks to let visitors call the line as an alternative to waiting for service; non-urgent cases could be required to show they had called the service before receiving treatment.


Anonymous said...

Campbell's expressed disgust with US intransigence over softwood may come into play here. If he can think laterally. Which has yet to be demonstrated.

Anonymous said...

The phrase "Privatization often makes sense. But not always." is erroneous. It should read: "Privatization rarely makes sense. But not always." If the British experience is anything to go by contract penalties are meaningless insofar as they either end with a costly renationalization (disguised as 'trusteeships'), or a renogotiation of the original contract to cover 'unanticipated' costs. Either way, the vast majority of privatization experiments have been - and continue to be - expensive experiments in inefficiency. But, hey, what's good for corporate America must good for B.C. taxpayers, right?

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