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Poor Contractor Contingency Fee Incentives
Tuesday, October 28th, 2014
Robert Wechsler
The last time I
discussed contingency fee arrangements in local government
contracting was 2007 (the focus then was on attorneys). A
front-page story in today's New York Times shows
clearly that I have not been giving this topic the attention it
deserves.
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:
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.
Robert Wechsler
Director of Research-Retired, City Ethics
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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:
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.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.
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.
Robert Wechsler
Director of Research-Retired, City Ethics
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