Does more competition make social services better? Outsourcing by the Ministry of Labor and Welfare

The privatization of social welfare services in Israel has been an on-going process since the 1980s, and has not been curbed in recent years. A study conducted by Researcher Shavit Madhala and Principal Researcher John Gal sheds light on this phenomenon and concentrates on the Ministry of Labor and Welfare’s outsourcing of welfare services to non-governmental agencies, whether for-profit businesses or non-profit organizations. The outsourcing process is carried out by government tenders inviting agencies to compete for a contract.

The assumptions underlying the outsourcing of social services are that this system allows for greater flexibility and more effective operation, and that competition between different specialized service providers will improve the service to Israeli citizens.

Understanding the outsourcing of public welfare services

There has been a considerable increase in public welfare services outsourced by the Ministry of Labor and Social Welfare since the turn of the century. In 2000, the Ministry spent about NIS 2.3 billion, or about 70% of its total budget, on outsourcing services (in 2015 prices). Yet by 2015, when the Ministry’s budget amounted to about NIS 6 billion, outsourcing spending rose to 80% of the Ministry budget, reaching NIS 4.8 billion. This money was dedicated to outsourcing in the areas of rehabilitation, intellectual developmental disabilities, correction services, and personal and social services.

To what types of institutions are these services outsourced? Service providers to the Ministry of Labor and Social Welfare include nonprofits alongside for-profit businesses. In 2015, the number of social service providers to the Welfare Ministry was 2,697, two-thirds of which were private businesses and one-third of which were nonprofit agencies.

Nonetheless, the payments to these different types of providers were similar: about half the payments went to nonprofits and half to private, for-profit providers. In the years that were examined in this study, there was a rise in the number of nonprofits providing services to the Ministry as well as a rise in the spending allocated to these organizations while, simultaneously, there was a drop in the number of for-profit providers.

Most of the service providers for the Ministry of Labor and Welfare are long-time providers, meaning they have worked with the Ministry for at least one year prior to 2015. While only 56% of the providers are considered long-time, these providers receive 94% of total outsourcing payments. This reflects the fact that the Ministry puts an emphasis on the experience of service providers and that, in various areas, it is important to the Ministry to keep the same providers they have used in the past so as to maintain consistency and not harm those receiving the services.

Concentration and competition in the welfare services market

Despite the fact that the 50 largest suppliers (receiving more than NIS 20 million each year) constituted only 2% of all the outsourced service providers used by the Ministry of Labor and Welfare in 2015, they received about 46% of the total resources allocated to outsource payments (compared to 49% in 2000). 48 of the 50 largest suppliers are also long-time providers. Overall, 58% of the largest providers in 2015 were long-time for-profit businesses, 38% were long-time nonprofits and 4% consisted of new organizations.

The study’s findings relating to concentration levels indicate that there is limited competition among service providers in the field. However, the data show that there has been a decrease in the number of welfare fields that are highly concentrated and an increase in the number with low concentration, meaning that, though competition remains low overall, outsourcing is becoming more competitive over time. This trend can be expected to have a positive effect on pricing and, possibly, on the quality of social services.

It is important to note that the competition between the providers takes place at the stage of being contracted by the government, and in most cases there is no competition between the providers over the service-receiving clients. Clients are generally referred to service providers by the Ministry or the local authority and often have little choice over which provider to use.

This study raises a question about the importance of competition in social welfare. On the one hand, the existence of competition between service providers is one of the justifications for privatization. On the other hand, in the series of interviews conducted for the study, it emerged that the Ministry selects providers mainly on the basis of their experience and expertise in providing the services.

Therefore, where the provider is satisfactory, competition is of little importance. Furthermore, it is widely argued that continuity of care in social services is more important than promoting competition through turnover. Continuity of care is meant to prevent upheavals due to staff changes, for instance, that could harm Israeli citizens receiving the services.