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Quality, Cost, and Purpose: Comparisons of Government and Private Sector Payments for Similar Services

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We count on government to do many important things – things we can’t do alone – like provide good schools, protect our environment, promote public safety, and offer a safety net for those facing misfortune. In fact, we frequently take these essential functions for granted. Furthermore, we hope and expect that our investments in these shared priorities will be made as efficiently as possible. But are they? Occasional gross misuses of tax dollars often make the news – as they should. We need to hold government to a high standard and demand that waste is attacked and eliminated. But how can
we really know whether our government is spending money wisely in general? One way to examine this question is by comparing what government pays with what private

purchasers pay for the same things, or for similar things. Some of the things that government does do not have private market comparisons – but many do. Much of what Massachusetts state government pays for is not services provided directly by public employees – as is commonly thought – but rather services that it purchases or funds local governments to provide.

This paper looks at what our state government pays for child care (which Massachusetts calls ‘‘early education and care’’ in recognition of the importance of quality early care in the educational development of children), health care, and education, and compares those costs to what is paid for those services in the private sector. We find that in providing child care for lower-income working parents, the state purchases care from providers who also provide care to private clients. The rates that the state pays these providers range from 66 percent to 96 percent of the median market rate in each region. Our state Medicaid program buys health care in the same market as private payers, but pays only 80 percent of the rates paid by private payers. Finally, this paper finds that the average cost of public schools, $13,000 per student, is dramatically below the cost of private schools, which average $32,000 per student – and generally educate children from less challenging backgrounds.

While we look at just three areas of government, they are major areas, together accounting for about half of all spending. What do we learn and where should it lead us? In the areas examined, government costs are significantly lower than private sector costs. Should this be seen as an encouragement of complacency? Absolutely not. Regardless of whether the public sector has higher or lower costs than the private sector, there is a need for ongoing vigilance to demand efficiency and identify and eliminate wasteful practices when they are found.

Is the fact that government pays significantly less than the private sector for many services always a good thing? This is a critical question that raises two important issues: quality and cost shifting. In the area of early education and care, issues of both quality and cost shifting are at play. As a major purchaser of child care services, the state plays a role in shaping the market, but also pays less than private payers for children in the same child care centers. Keeping the rates it pays low forces providers to keep costs down. As the major cost for child care providers is labor, this results in low wages, leading to high turnover and difficulty in attracting well-trained and educated providers that could improve the quality of care provided.

In health care, quality is probably less of a concern. The state buys services in the same hospitals and from the same doctors that private insurers pay. We are aware of no evidence that those providers vary the quality of the care they provide based on the source of payment. The more likely result is cost-shifting: when providers are paid less than the cost of care by public payers, there is evidence that they increase rates for private payers to make up the losses. The result can be that the “savings” taxpayers achieve by government paying less than market rates may ultimately be paid by those same people in their health insurance rates.

Finally, in education, the quality issue is front and center: is the state paying half of the private sector cost of elementary and secondary education and getting the same quality, or could the state provide higher quality education if it paid closer to the market price?

This paper examines these issues in more detail, looking carefully at market costs and how they compare to what the state pays. It also examines some of the implications of those differences. In a democracy, the issue of how the taxes that everyone pays are used to achieve common goals is among the most important issues of public debate. This paper aims to support that debate by providing a clearer picture of how public dollars are spent in three important areas.