Poor Contractor Contingency Fee Incentives
<a href="http://www.cityethics.org/node/313" target="”_blank”">The last time I
discussed</a> contingency fee arrangements in local government
contracting was 2007 (the focus then was on attorneys). <a href="http://www.nytimes.com/2014/10/28/nyregion/new-york-city-agency-and-ven…; target="”_blank”">A
front-page story in today's New York <i>Times</i></a> shows
clearly that I have not been giving this topic the attention it
deserves.<br>
<br>
Allegations have been made by the U.S. Attorney for the Southern
District of New York (disclosure: I worked for this office as a law
school intern back in 1977-78) that a New York City department and
an IT contractor were engaged in defrauding Medicaid over a
five-year period, at a cost of tens of millions of dollars. With
respect to government ethics, the central paragraph of the article
is as follows:<blockquote>
The complaint suggested that the fraud scheme was designed to serve
the city’s and the company’s economic interests, noting that the
city linked the amount of fees it paid to the amount of Medicaid
payments the company obtained for the city.</blockquote>
In other words, the IT contractor was being paid on a contingency
fee basis or, in more common terms, it was being given a commission
on what the department obtained from Medicaid, even though its job
was to facilitate the process, not take responsibility for who paid
bills and how much. This gave the contractor an incentive to defraud
Medicaid, and the city department an incentive to be
complicit in the scheme.<br>
<br>
There is no reason to give contractors an incentive to act in their
self-interest. They should be paid for the work they do, not for the
funds their work brings in. This goes against the way businesses and employees are
supposed to be paid in the free market (although they too are often
not paid on the basis of financial results). But government is not the same as
business. The work of government contractors and employees should include a
consideration of the quality of the work done, the public interest, and fairness and other ethical
considerations. Government employees and contractors, including
professionals, should not be given an incentive to put their
personal interests first.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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