COFAR blog

In what may be one of the first tests of the Pacheco Law in the privatization of human services, the Baker administration is seeking to contract out existing emergency mental health services in southeastern Massachusetts.

What concerns us about this situation is that the administration is reportedly interpreting the Pacheco Law to allow a for-profit company, the Massachusetts Behavioral Health Partnership (MBHP), to cut its proposed wage rates within roughly a year after starting to provide those services and potentially to pocket the extra profits.

This is not surprising given that a key executive from MBHP was appointed to a new position in the Baker administration that appears to have at least a supervisory role over contracts with the company. (More about that below.)

The administration’s interpretation of the Pacheco Law has drawn a rebuke from the law’s author, state Senator Marc Pacheco.

First, however, a bit of background: The Pacheco Law requires a state agency seeking to privatize services to submit to the state auditor a comparison of a bid or bids from outside contractors with a bid from existing employees based on the cost of providing the services in-house “in the most cost-efficient manner.”

If the state auditor concurs that the outside bidder’s proposed contract is less expensive and equal or better in quality than what existing employees have proposed, the privatization plan will be likely to be approved.  If not, the auditor is likely to rule that the service must stay in-house.

Two key provisions of the Pacheco Law that potentially apply here are:

1. 1.  Under the law, an outside contractor’s proposed bid must specify wages at the lesser of either the average private-sector wage for the equivalent position or the lowest public-sector wage level for the position. In other words, the law establishes a minimum wage rate that the outside contractor must propose.
   2. The Pacheco Law does not apply when contracts for privatized services are renewed.  In other words, if a private bidder wins a contract under the Pacheco Law process, that contractor does not have to undergo another review by the auditor in order to renew the contract.

The reason that Provision 2 above is pertinent to this case is that MBHP currently has an ongoing Primary Care Clinician (PCC) contract with MassHealth for separate clinician services that is scheduled to run through June 30, 2017.

As we understand it, the administration intends that the current PCC clinician services contract with MBHP will become the overall contract for the emergency services that the administration is now seeking to privatize.  And the administration’s interpretation of Provision 2 above is that if the privatization plan is approved by the auditor, all of the contract provisions in the contract bid will cease to exist when the current PCC contract is renewed.

Thus, it is reportedly the administration’s position that after the MBHP’s PCC contract with MassHealth officially ends in June 2017, MBHP will be legally free to cut the wage levels it is stipulating in its bid.  If so, we believe it is unlikely that the company would pass along the savings in cutting wages to state taxpayers, but would instead pocket those savings as profit. As a for-profit, MBHP has an incentive to pocket any operating cost savings as retained earnings.

The administration’s interpretation of the Pacheco Law is ironic because one of the main objections to the law from the law’s most vocal opponent, the Pioneer Institute, is that the bidding contractor in a privatization proposal is required to stick to the terms of its bid whereas there is nothing in the law to ensure that the terms of a state employee bid are enforced.

As Pioneer stated in an influential report last year (linked above):

 The Pacheco Law does not contain any requirement that agency employees subsequently provide service in the most cost efficient manner or in an improved manner if the proposed privatization contract is rejected.

But in fact, it appears that it is the administration’s interpretation that it is the outside contractor that doesn’t have to stand by its bid once its contract is renewed.

Sen. Pacheco himself has warned that the administration’s interpretation of the law that was named for him would “undermine” the intent of the law.  In a letter sent to Attorney General Maura Healey in November, Pacheco stated that:

Although renewal contracts for validly privatized work do not need to be resubmitted to the Auditor (for a Pacheco Law review), it was never my or the other supporters’ intent that wages and health benefits could sink lower than the “minimum wage” established by the Taxpayer Protection Act (the Pacheco Law) once the initial contract expired.  If that is permitted, the statutory purposes of preserving the quality of publicly funded services and providing minimum protections for private sector and public workers would be completely undermined.

Moreover, it seems to us that the Pacheco Law does prevent the state employees from submitting an artificially low bid and then subsequently ignoring it. The Pacheco Law states that if the employees want to submit a bid with wage costs that are lower than what are in a collective bargaining agreement, they must negotiate a change in that agreement with the applicable state agency.  That new collective bargaining agreement is binding on the state employees and cannot be changed unless the state agency agrees.

A potential decline in service quality

As we understand it, the Baker administration is projecting a savings of $5 million a year in privatizing the emergency mental health services in Southeastern Massachusetts.

SEIU Local 509, a state employee union, has put in a bid on behalf of the state employees currently providing the emergency services that envisions saving about $500,000 per year.  So, the state auditor may well determine that there would be a greater savings in privatizing the services.  However, the union is arguing that the quality of those services is likely to decline under the privatization plan because the financial savings will depend on major cuts in staffing.

The administration’s reported interpretation of the Pacheco Law’s contract renewal provision appears to bear out the SEIU’s concerns about a potential drop in the quality of the privatized services offered by MBHP. If MBHP or its subcontracting firms are legally free as of mid-2017 to cut the wage rates proposed in MBHP’s bid for the emergency services, it seems to us to be very likely that the quality of those services will suffer.

Political connections appear to have played a role in the MBHP case

It’s hard to overstate how politically connected MBHP is.  There appear to be a number of close relationships between the company and the Baker administration and with previous administrations — and in particular with the Executive Office of Health and Human Services, which will oversee the privatized mental health services.

Last April, Scott Taberner, previously the chief financial officer at MBHP, was named Chief of Behavioral Health and Supportive Care in MassHealth, the division of EOHHS that administers Medicaid and healthcare for low income and disabled persons.  Taberner’s position in Masshealth was created by the Baker administration.  MassHealth is seeking the privatized mental health services contract with MBHP.

Prior to that, in late May 2014, Beacon Health Strategies (Beacon) announced its plan to merge with ValueOptions, the parent company of MBHP.  Under the arrangement, Beacon will be 50 percent owned by Bain Capital and 50 percent owned by Diamond Castle Holdings.

Bain Capital was formed by former Massachusetts Governor Mitt Romney.  Last April, the same month that Taberner joined the Baker administration, former Massachusetts Governor Deval Patrick joined Bain as a “social impact” investment advisor.  That doesn’t appear to have any direct connection to the proposed MBHP privatization contract, but I thought I’d throw that in.

According to the Mass. Psychological Assn. (MPA), ValueOptions and Beacon both hold a large market share in programs in Massachusetts that are paid for through public funds.  As noted, MBHP manages benefits for the PCC program.  The MPA estimated that once the merger was finalized, Beacon would manage the behavioral health benefits of  78 percent of the Massachusetts Group Insurance Commission members and of 70 percent of MassHealth members.

A coalition of health care advocacy groups signed onto an MPA letter in August 2014 to the Mass. Health Policy Commission, expressing concern about the proposed merger of Beacon and ValueOptions.  The letter stated that the merger “will limit the already narrow choices offered to insured individuals whose primary diagnosis is related to behavioral health…”

It does appear that the merger went through.  Now it appears that MBHP is being primed by the administration to run the privatized emergency mental health contract via MassHealth; and Taberner, a former MBHP executive, appears to be involved in that effort or is at least in a position to oversee it.

The administration itself has described Taberner’s new position at MassHealth as follows:

…Taberner will lead reforms to better coordinate and integrate care for behavioral health, physical health and long-term services and supports for elders and persons with disabilities.

The Baker administration wants to make the emergency mental health services part of the MassHealth PCC contract with MBHP.  A former MBHP executive is now in a high-level position in the state agency contracting with his former company.  And now the administration is interpreting the Pacheco Law in MBHP’s favor by indicating that if the privatization plan is approved, MBHP will be legally free to cut wage levels as of June 2017 when its PCC contract up for renewal.