In August of 2000 the National Center for Children in Poverty, at Columbia University, released a study showing that despite the country's recent economic boom, 13 million American children were living in poverty—three million more than in 1979. For most Americans that was unsettling news, but for a small group of publicly traded companies it represented an opportunity. As the ranks of children living in poverty have grown during the past two decades, so have the ranks of juveniles filing through the nation's dependency and delinquency courts, typically landing in special-education programs, psychiatric-treatment centers, orphanages, and juvenile prisons. These were formerly run almost exclusively by nonprofit and public agencies. In the mid-1990s, however, a number of large, multistate for-profit companies emerged to form what Wall Street soon termed the "at-risk-youth industry."
The financial incentives were compelling. In 1997 SunTrust Equitable Securities, one of the nation's leading investment firms, published a forty-five-page report titled "At-Risk Youth ... A Growth Industry," which estimated that annual public spending on youth services amounted to $50 billion. The report appeared shortly after Congress passed the 1996 Welfare Reform Act, which included a provision allowing for-profit companies to tap into child-welfare funds that had previously been reserved largely for nonprofit agencies.
The SunTrust report documented an array of disquieting social trends—including rising numbers of children living with single parents and in working-poor families—that from the industry's perspective sounded like good news. "Not only has the raw number of abused and neglected children increased," SunTrust observed, "but ... the rate of children reported as abused and neglected has increased from 28 per 1,000 children in 1984 to 43 per 1,000 in 1993." A diagram titled the "Privatization Spectrum" showed how companies could profit as children cycled "from the schoolhouse to the jailhouse," passing through one publicly funded, privately run facility after another. Arrows marked the flow of kids to companies offering programs in special education (a $32 billion market), child welfare ($12-$15 billion), and juvenile justice ($3.5 billion). No arrows indicated how these children might one day exit the system and lead ordinary lives.
Today, five years after the release of the SunTrust report, the prospects for the at-risk-youth industry are less rosy. Claims that contracting out social services would improve efficiency and lower costs have not panned out—and the projected windfalls for private contractors have failed to materialize. Many state and local governments, however, continue to entrust social services to profit-driven companies. Examining the records of some of the industry's leaders highlights the substantial social costs of doing so.
Consider the Pahokee Youth Development Center, a 350-bed facility for "moderate-risk" youth, set on the northern edge of the Everglades and opened, in 1997, by Correctional Services Corporation, one of the nation's largest at-risk-youth companies. James Slattery, CSC's co-founder and CEO, promised that the facility would save taxpayers money while turning out "reformed, treated youths." But in 1998 an independent monitor assigned by the state found inadequate staff training and insufficient medical services, and the Florida Department of Juvenile Justice's inspector general confirmed numerous cases in which staff members had used "unnecessary and improper force" against youths.
CSC—which denied requests for interviews—seemed more interested in finding creative ways to maximize revenue than in rehabilitating kids. Although the state paid the company some $2.5 million a year to provide education, Pahokee failed to maintain proper student records, and for several weeks in the 1998 school year it held no classes whatsoever. A company document has revealed that CSC intentionally delayed the release of ten juveniles so as to maintain the head count, which determined payment. The following year, after Pahokee failed its second state quality-assurance review, CSC canceled its contract, and the facility was taken over by another company.
Children's Comprehensive Services is another case in point. CCS grew out of a Tennessee-based prison company named Pricor, which in 1994 was $10 million in debt. Five years later, in 1999, when CCS was at its peak, it had programs in fourteen states and annual revenues of $115 million. William J. Ballard, the company's CEO and the man largely responsible for the turnaround, is a businessman who specialized in mergers and acquisitions and came to CCS with, he says, "no background in treatment or education" of children. In 1998, at a CCS psychiatric-treatment center in Montana, two suicides and three attempted suicides occurred within fifteen days; allegations in a lawsuit brought by the State of Montana attributed the deaths to chronic understaffing, which investigations by three outside agencies seemed to support. (Children on suicide alert were left unsupervised.) Understaffing and low pay are common cost-cutting techniques among for-profit providers of social services, for whom staff salaries are by far the largest expense.
Ramsay Youth Services, based in Coral Gables, Florida, began as a chain of psychiatric hospitals. Luis Lamela, the president and CEO, is a businessman who worked for Florida's first licensed health-maintenance organization. The one thing Ramsay will never do, Lamela told us in an interview, is warehouse kids—yet he also spoke about Ramsay's clients in language that might startle children's advocates. "It's a product-to-market approach," he explained. "We view everything as a product." He then opened a binder he called the "product-market matrix," in which charts displayed sex-offender programs, psychiatric-treatment centers, and other Ramsay services, all crosslisted with states where a rising demand for these services has been projected. Treating neglected children, Lamela said, is essentially no different from manufacturing widgets.
To be sure, problems in the youth-services field are by no means confined to the private sector. In both the mental-health and juvenile-justice fields, in fact, it was government's failure to provide adequate care that paved the way for privatization: a series of class-action lawsuits in the 1970s and 1980s forced states to shut down many abusive government-run mental-health institutions, and the 1974 Juvenile Justice and Delinquency Prevention Act provided states with federal funding to develop community-based treatment services as an alternative to incarceration with adults. A small contracting empire arose in response, with millions of dollars made available to private providers of services. During this first wave of privatization, contracts were awarded mostly to nonprofit and mom-and-pop organizations, many of which pioneered small, local programs in which staff members could develop close relationships with youths. Not until the 1990s did large, multi-state, for-profit companies—some, such as Wackenhut and Correctional Corporation of America, having earlier cut their teeth in the adult prison industry—become major players in the bidding process. They were enticed, in part, by the per diems attached to juveniles, which are higher than those for adults. (Juveniles are eligible for rehabilitative services such as education and mental health.)
When assessing the strength of these companies, Wall Street analysts have focused not on treatment methods or philosophy but on capacity. Investment reports highlight each company's recent acquisitions, referred to as "wins," and tally up the number of new "beds/slots." Although some companies do run a variety of smaller programs, industry leaders admit to a preference for large facilities. "I look at it in terms of size," Luis Lamela says. "What we look for is the achievement of economies of scale."
The trouble is that large-scale institutions rarely offer individualized treatment. According to Barry Krisberg, the president of the National Council on Crime and Delinquency, a substantial body of evidence shows that smaller programs are more conducive to rehabilitation. One NCCD study found that youths from Massachusetts, a state that runs mostly small-scale programs, had lower rates of recidivism than youths from California, which relies heavily on large institutions. In 2000 an array of leading advocacy groups, including the National Urban League and the American Youth Policy Forum, issued a report calling for a shift in resources away from large-scale, prisonlike facilities and toward community-based, early-stage treatment and prevention programs. "Along with large facilities comes too few staff for too many kids," Krisberg says. "Administrators start to resort to stringent security measures—shakedowns, lockdowns—and the facility starts to look and feel like a prison ... There's a replication of the conflicts in the streets."