FACTORS INFLUENCING THE PROPENSITY TO CONTRACT OUT HEALTH AND HUMAN SERVICES IN RESPONSE TO GOVERNMENT CUTBACKS: EVIDENCE FROM US COUNTIES.

AuthorKim, Min-Hyu
  1. Introduction

    Government finances remain vulnerable due to the cyclical peaks and troughs in the national economy as well as the frequent fundamental changes in public revenue. Since the end of 2009, the global economy has undergone chronic fiscal shortfalls because of transitory economic shocks and structural budget deficits resulting from the weak economy (Feaster et al., 2011), to which the U.S. is no exception. Fiscal stress 'financial pressure on a government from factors such as revenue shortfalls, as well as taxing and spending limitations'--force government agencies to stave off fiscal imbalances by downsizing and other strategies (Bowman and Kearney, 2017, p. 362). Policymakers search persistently for solutions when recessionary clouds hover over the financial horizon. Government agencies contend with more stringent budgetary constraints than for-profit businesses when they are hit hard by significant fiscal challenges. Governments at all levels respond by cutting spending since fiscal stress remains the most serious threat, even for the most capable agencies.

    Under these circumstances, government agencies have traditionally contracted out services as one strategy to manage budget cutbacks (Lopez-Hernandez et al., 2018; Sun, 2010; Chen, 2013; West and Condrey, 2010). The underlying assumption was that contracting out is one of the most effective interventions to curb expenditures to buffer the repercussions of pressing fiscal problems (Ladi and Tsarouhas, 2014). For example, the U.S. federal government spent over 500 billion U.S. dollars for contracted products and services in 2012 (Government Accountability Office, 2017). Yet current research offers little systematic insight into whether and how this relationship between fiscal stress and the propensity to contract out might vary by sector. Do efforts to contract out appeal differently to nonprofits, private firms, and other government agencies? Several theoretical frameworks have been used to model the propensity to contract out (Niskanen, 1971; Zafra-Gomez et al., 2016; Williamson, 1981; Brown and Potoski, 2003). These theories rest on the assumption that government agencies have adequate revenue to cover expenses. However, what if government agencies experience fiscal stress during an economic downturn?

    This study was designed to add to this literature by analyzing the influence of theory-based factors that may explain the propensity to contract out health and human services to different vendors in the context of U.S. county-level agencies. We distinguished between three service delivery modes (nonprofit organizations, private firms and other government agencies). This study examines empirically why some government agencies have a greater likelihood to contract out in response to budget cutbacks, and makes an original and significant contribution to our understanding of the factors that influence the propensity to contract out. The next section provides a review of the previous literature and is followed by a discussion of the hypotheses, methods, and results, concluding with a discussion of the implications for research and practice.

  2. The relationship between changes in resource levels and contracting out: a contingency approach

    Contingency theory suggests that government agencies implement contracting out as a cutback management strategy (Levine et al., 1981; Sun, 2010; Jimenez, 2017; Chen, 2013). Contingency theorists (Burns and Stalker, 1961; Galbraith, 1977; Lawrence and Lorsch, 1967) have argued that different service delivery modes are appropriate in different decision contexts. Specifically, the choice of sector with which to contract, like other administrative functions, involves values and choices, i.e., uncertainty about goals, means, and the contexts within which decisions are made. Fiscal stress is a critical example of external environments in contingency approaches, because lack of funding is one of the most difficult crises that organizations face.

    Levine et al. (1981) demonstrated that U.S. local governments contract out services depending on the interactions of several factors: (1) changes in financial resource levels, (2) the formal authority structure, (3) interest group structure, and (4) subsequent outcomes of these strategies. This study focuses on three factors in this model because the combined effects of changes in resource level, formal authority, and interest groups influence the local governments' contracting out strategies (Levine et al., 1981; Chen, 2013).

    2.1. Changes in resource levels

    Empirical research has demonstrated the positive effects of fiscal stress on the propensity to contract out (Brown et al., 2008; Dijkgraaf et al., 2003; Ferris and Graddy, 1988). For example, Brudney et al. (2005) found that U.S. state agencies experiencing higher levels of fiscal need or demand for expenditures are more likely to contract out a larger percentage of their budgets. Lu (2013) also found that U.S. state governments that face greater fiscal difficulty are more likely to contract out their human services to nonprofits.

    We hypothesize that managers' perceptions of cutbacks and actual fiscal stress are associated positively with the propensity to contract out (Brown et al., 2008; Dijkgraaf et al., 2003; Ferris and Graddy, 1988). The purpose of this study is to examine the relationship between cutback levels and local governments' propensity to contract out fully by exploring how self-reported and objective measures of fiscal condition affect contracting decisions. The outcome variable is the propensity to contract out, and the key predictors are managers' perceptions and objective measures of fiscal stress.

    Hypothesis 1-A: There is a positive relationship between managers' perceptions of cutbacks and the propensity to contract out.

    Hypothesis 1-B: Counties facing heavier fiscal stress are more likely to contract out.

    2.2. Training and development

    Training and development include, among other things, mentoring, cross-training, and professional development (Pynes, 2003). These programs involve classroom activities as well as practical on-the-job training by current employees. Most county-level government agencies try to implement their professional training and development activities, because these activities provide the basic training for their newly-hired staff that otherwise could not be provided.

    Advocates of contracting out argue that there are cost benefits associated with contracting out training and development units (Hall, 2000; Domberger, 1998). If training is one of the first aspects to be cut when faced with fiscal stress (Lewis, 1988), the local governments that train and develop their employees are likely to contract out more as well, in the hopes that contracting out would alleviate fiscal pressures. Thus, public managers under new challenges such as budget cuts are more likely to contract out their training and development units for fiscal reasons. As a result, public managers who focus on training and development are more likely to contract out services in response to cutbacks. Therefore, we hypothesize:

    Hypothesis 2: There is a positive relationship between the importance a local government places on training and development and the propensity to contract out.

    2.3. Political factors

    According to Levine et al. (1981), county directors perceive state and county political leadership to be consequential factors, because the pressure of cutting back trickles down from state and county governments. Thus, county directors' perceptions of state and county political leadership influence their decision to contract out. However, public managers may perceive the effects of county political leadership differently because the majority of counties do not have elected executives. Therefore, we hypothesize an open relationship between county political leadership and the propensity to contract out.

    Hypothesis 3-A: There is a positive relationship between state political leadership and the propensity to contract out.

    Hypothesis 3-B: There is a relationship between county political leadership and the propensity to contract out.

    While Republican or Democratic state and county political leadership plays an important role in the propensity to contract out, the relationship is rather complex. At a conceptual level, conservative political leadership traditionally has valued limited government, often criticized government expansion, and viewed government programs as a potential threat to individual, county, or state liberty (Dubin and Navarro, 1988; Walls et al., 2005). However, as contracting out has become a more popular option, it has transcended party boundaries, and interests in contracting out can no longer be viewed as solely conservative agendas. Therefore, this study hypothesizes an open relationship between the state legislators' parties representing the county and the propensity to contract out.

    Hypothesis 3-C: There is a relationship between state legislators' parties representing counties and the propensity to contract out.

    Previous literature has argued that the governors' political party has an important influence on the local-level decision making (Warner and Hebdon, 2001; Williams, 1986). Because both Democratic and Republican governors care about cost savings, politics can work both ways in the influence of governors' political parties on the contracting decision. Therefore, the study also hypothesizes an open relationship between governors' parties and the propensity to contract out.

    Hypothesis 3-D: There is a relationship between governors' parties and the propensity to contract out.

    2.4. Diversity as a goal

    Previous studies warned about the negative effects contracting out reform efforts could have on diversity efforts (Radin, 2012). For example, Stein (1994) found that contracting out in response to cutbacks tends to disproportionately harm African American employees. Diversity in this study...

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