Social services market evolves, learning to live on less.

Just five years ago, states were flush with tax revenues in a booming economy. States sought to farm out social services under a federal policy designed to move people from welfare to work. State and local governments were fueling competition between nonprofit agencies and for-profit providers for services ranging from day care to job training.

The spike in competition triggered fears among some nonprofit leaders that people with urgent needs could lose services, and that charities chasing new business could lose sight of their social mission.

From the early to mid-1980s to the late 90s, nonprofits had lost a big share of the market in child-care and home healthcare jobs, according to The State of Nonprofit America, a 2002 report published by Brookings Institution Press.

Worried about such trends, nonprofit leaders wanted to ensure that commercial firms' drive for profits would not leave people in need without services if the costs outweighed financial returns. "The profit motive changes the climate in which decisions are made, goals are determined and progress is monitored," a group of chief executives of 18 big national health-and-human-services nonprofits said in a Statement of Principles published in THE NONPROFIT TIMES in February, 2000.

Those leaders' worst fears have not materialized during the past five years, a period when big changes have reshaped the social-services market, nonprofit executives and experts said.

The economy has soured, tax revenues have shrunk and government outsourcing has proved troublesome, shifting the focus of concerns about the for-profit delivery of social services, they said. "We really are talking about a fairly extreme contraction of resources," said Jill Schumann, president and CEO of Baltimore-based Lutheran Services in America.

Instead of focusing on whether to contract with for-profit or nonprofit agencies, the "more pressing question for most governments is for whom do we purchase these services," she said. "As the dollars are shrinking, governments must decide who will be denied services."

Contract bridge

Federal "welfare-reform" policies of the 1990s increased the competition to deliver social services, said Stephen Rathgeb Smith, a professor of public affairs at the University of Washington who studies nonprofit social services.

Several big for-profit firms, like Lockheed Martin and Curtis & Associates, moved into the niche of managing and administering government contracts, he said, but they tended to work with nonprofit subcontractors.

"For-profits were managing the contracts and relying on the existing nonprofit providers to provide the services," he said.

And as government funding peaked during late 1990s through 2001, he said, the number of nonprofit providers actually grew, sometimes in substantial numbers. And many nonprofits got bigger.

"Some nonprofit providers that had never contracted with government got into the business of providing welfare-to-work services," he said. "It was a period mirroring the rising economy and rising federal dollars."

And with new government regulations tightening eligibility for cash-assistance, many governments put the savings from cash-assistance into direct services. "There was more money available," he said. "So many nonprofits were in a position to provide these new services government was expecting to help people get off from the welfare rolls and get a job."

But the economy stumbled in recent years, and tax revenues have plunged, he said, eroding the incentive that for-profit firms had to compete in the social-services market.

"For-profit providers tend to move into providing services when money is rising, when they can take advantage of changing government regulations or funding policies," he said, citing recent research.

Reality check

Government efforts to hire private contractors to curb costs while maintaining or improving social services have run afoul of unrealistic expectations and contractual problems, experts said.

In the area of mental health, some private firms "didn't understand the full needs of people who are reliant on public assistance," said Michael Faenza, president and CEO of the National Mental Health Association in Alexandria, Va.

Intent on cutting costs, he said, public agencies wrote flawed contracts with managed-care firms, neglecting to take a "holistic approach" that would have provided critical services like housing, vocational training and psycho-social rehabilitation for people with serious mental health problems. And while their pitch to public agencies promised to pay attention to preventive services that ultimately would reduce patient costs, managed-care firms instead focused on reducing symptoms, he said.

Once they recognized their agreements put them at financial risk, managed-care firms responsible for hundreds of thousands of patients broke their contracts, he said. And because public agencies had invested so much in farming out the services, they lacked the resources to provide them, leaving patients without services.

Now, Faenza said, escalating healthcare costs and the public sector's economic crisis are "really making the situation worse and putting more pressure on the need to control costs."

Compounding the problem, he said, are new and proposed federal policies and budget cuts that are tightening eligibility requirements for many services, forcing massive layoffs of health-care professionals, and letting states spend money free of federal oversight.

Service gap

Some social services simply offer no payoff to for-profit providers, nonprofit executives and experts said. "When you're dealing with homeless shelters and transitional shelters and soup kitchens and feeding programs, it's not very attractive to a profit-making organization," said Commissioner W. Todd Bassett, national commander of The Salvation Army in Alexandria, Va.

"There is not adequate funding to begin with, so we run it on a shoestring and volunteers," he said.

Yet demand for social services is growing. Catholic Charities USA, for example, has seen an increase in people needing emergency services such as shelter, food and clothing, said Thomas A. DeStefano, interim president.

At 86 local Catholic Charities agencies the organization surveyed recently, 73 percent reported greater demand for assistance for rent, mortgage and utilities; 69 percent reported more requests for food; 77 percent reported more families seeking help; and 63 percent said more seniors were requesting aid.

Burton Weisbrod, an economics professor at Northwestern University in Evanston, Ill., said the drive for profits can shape the markets and clients that companies target. In a recent study, for example, Weisbrod and Richard Lindrooth of the Medical College of South Carolina found patients at for-profit hospices stayed a lot longer on average than those at nonprofit hospices.

Because the first five and last five days of care are the most labor-intensive and thus the most expensive, and because Medicare pays a set daily reimbursement, Weisbrod said, for-profit hospices are more likely than nonprofits to take advantage of the financial incentives to attract patients likely to stay longer.

The study also found that cancer patients, who typically do not live long once at a hospice, account for a much smaller percentage of patients at for-profit hospices than at nonprofit hospices. "It appears that nonprofits are more concerned about social mission, to provide needed services, whether profitable or not," Weisbrod said.

New challenges

Growing demand and the lack of a financial payoff leave nonprofits with critical challenges, said Peter Goldberg, president and CEO of the Milwaukee-based Alliance for Children and Families. "The nonprofit sector clearly has become the sector of choice for the delivery of what used to be public-sector services," he said. "But we're being asked too often to deliver them in a way that forces us to either take a loss or use non-public sector money to subsidize and supplement the delivery of public-sector services."

Government contracting also has increased government "ownership" of a growing number of nonprofits that find a bigger share of their budgets dependent on public funds, he said. And as its contractor, he said, nonprofits may find it tough to also be government's conscience.

So nonprofits need to "reassert and strengthen our advocacy capacities," Goldberg said. "We're going to have to figure out how to be more muscular in the court of public opinion and the battle for the hearts and minds of the American public."

While nonprofit leaders might have overestimated how much the profit motive would drive delivery of community-based services, concern about competition remains a big issue among the 300-member agencies of Lutheran Services in America, Schumann said.

"In an environment of contracting resources, the question is how much redundant capacity can a community afford to provide various kinds of services," she said. "People are just trying to hang in and keep providing the services."

Smith said declining public dollars, plus a push by the Bush administration to direct more of those funds to faith-based charities, could force secular nonprofits to adapt through cutbacks, consolidations and mergers.

Larger nonprofits actually could have an edge compared to for-profit providers and smaller nonprofits, he said, because they have the resources and ability to "cross-subsidize" services with private donations, investment income and special-events revenue.

"It's a very tough environment out there now," he said.

In the face of new "intersections" of personal and community responsibility, competition and cooperation, public and private funding, and "entitlement, empowerment and engagement," Schumann said, nonprofits need to renew what makes them distinct.

"Nonprofits embody 'organized neighborliness,'" she said, citing a report on ethics by Independent Sector in Washington, D.C. "Organized neighborliness occurs through institutions that have governance structures representing the community, that are engaged in public trust, and that really create a different fabric of care than a purely marketplace-driven approach does."

Todd Cohen is editor and publisher of Philanthropy Journal, an online newspaper at www.philanthropyjournal.org. His email address is [e-mail].