The Outsourcing of Welfare Services: Trends and Changes

The privatization of social welfare services is a process that has been on-going since the 1980s. This chapter sheds light on the phenomenon and concentrates on the privatization process as it relates to an array of services of the Ministry of Labor and Social Affairs. At the center of the analysis stand two questions: (1) What are the activity patterns of for-profit and nonprofit agencies working in this field? (2) Can we identify trends in market concentration in welfare service provision?

The study’s findings indicate that the extent of services that are outsourced by the Ministry has grown over the years: from 70% of the Ministry’s total expenditure in 2000 to about 80% in 2015. The majority of service providers to this ministry are veterans in the field, and they garner about 96% of the total payments for outsourced services. The findings relating to concentration levels indicate that competition among service providers in the field of personal social services is limited. The majority of the 50 largest providers, whose share among all of the outsourced service providers is about 2%, have provided services for many years and they garner about 46% of the total expenditures for outsourced services.

It is evident that there is no particular preference for nonprofit agencies in this process, and that in the eyes of policy makers there is no essential difference between for-profit and nonprofit agencies. The analysis of providers showed that most of them are for-profit providers. Nonetheless, the distribution of payments between the two kinds of providers indicates that about half of the payments went to nonprofits. In the years that were examined, there was a rise in the number of nonprofits working with the Ministry, and a simultaneous drop in the number of for-profit providers.

While competition among service providers is limited, the concentration indexes tested for the various departments indicate that competition does exist and is actually increasing with time. The research and results of the analysis raise the question of the importance of competition in the social service markets. 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 providers are selected mainly on the basis of their experience and expertise in providing the services. Thus, in a domain of services where there is a satisfactory provider, competition is of little importance. Moreover, it is argued that, in the social services, it is important to maintain continuity of care by a single service provider instead of encouraging turnover. This is meant to prevent upheavals due to staff changes, for instance, that could harm service recipients, especially when it comes to institutional settings.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2016, edited by Prof. Avi Weiss.