To control costs, state governments are increasingly moving toward the privatization of social services. How much should a state pay its private vendors for providing those services? This is always a tricky question, and its answer hinges on ever-changing uncertainties. Dr. Anthony Broskowski�s consulting firm, Pareto Solutions, helps state governments plan the privatization process for mental health and child welfare services. Trained as a clinical psychologist and a statistician, Dr. Broskowski advises state governments on vendors� administrative cost structures, the mix of appropriate services, and the long-range costs they can expect to pay for those services as well as traditional services. For more than a decade, he has relied on @RISK to make his budget projections.
The Risk-Reward Corridor
�Contracting for social services is a risk-reward corridor that both government and vendors must travel through,� says Dr. Broskowski, and the doors to many uncertainties open onto this corridor. Take his recent work for the city of Washington, D.C. The district wanted to privatize the foster-care component of its child welfare program, under a system in which a vendor would receive a prepaid allotment for every child needing a foster care placement. Under this system, the vendor would assume the costs and the risks of cost fluctuations until the child can be reunited with his or her family or attains some other permanency status, such as adoption. To compensate for assuming these risks, the vendor would retain any portion of the government�s payment left over after expenses, within a range of plus or minus 85% of the expected total costs. Dr. Broskowski says that to figure out a fair rate to pay the service provider, �You can�t use a simple formula like number of children x number of days of care x price per unit.� There are too many other factors, such as:
- local population trends
- variability of investigation standards
- the case-mix of children by age and reason for removal from the home
- the rate at which children enter the system
- the types of services and levels of placements each child needs
- the unit cost other providers are paid for services and placements
- how long will each child will need each service and remain in each placement.
In addition, Dr. Broskowski’s models must develop the formulas for distributing the risks more equally between the vendor and the government. These include repaying profits beyond a certain level and stop-loss provisions for the highest-cost cases, such as medically fragile children.
Big Decisions, Big Model
A Simultaneous Equation
“With @RISK,” Dr. Broskowski says, “the real challenge isn’t the modeling. The real challenge is getting the folks in government to accept their role in risk sharing. Because the vendors are in business, risk-and-reward comes easier to them than to government officials letting out contracts. But here again, @RISK is so intuitive it makes it easy to show people how to balance the risks with the opportunities and come to some kind of equilibrium. It can help them actually see that this kind of contract is a simultaneous risk-opportunity equation.” Just the kind of equation to be solved by a company named Pareto Solutions.
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