CONTRACTING STATE


    JODY FREEMAN*


I. INTRODUCTION.................................................................................................... 155
II. PRIVATIZATION.................................................................................................... 160
III. GOVERNMENT-PRIVATECONTRACTS................................................................... 164


 A. Objections to Contracting Out..................................................................... 169


 1. Consequentialist Concerns.................................................................... 169
2. “Technocratic” Concerns........................................................................ 170
3. Ethical Concerns................................................................................... 172
4. Administrative Law Concerns.............................................................. 174


  a. Examples.......................................................................................... 176


  i. Nursing Homes........................................................................ 177
ii. Medicaid and Managed Care.................................................. 180
iii. Private Prisons......................................................................... 185
IV. REGULATORY CONTRACTS................................................................................... 189


 A. Regulation as Negotiation........................................................................... 189
B. Experiments in “Contractual” Regulation................................................... 191
C. Objections to Regulatory Contracts............................................................. 198


 1. The “Undemocratic” Critique................................................................ 198
2. Ousting Public Law Norms................................................................... 199
V. CONTRACT
AS AN ACCOUNTABILITY MECHANISM............................................... 201
VI. THE UNCOMFORTABLE INTERFACE
OF PUBLIC LAW NORMS


 AND PRIVATE LAW PRINCIPLES........................................................................... 207
VII. CONCLUSION....................................................................................................... 212


    I. INTRODUCTION


The modern administrative state might aptly be dubbed “the con-tracting state.” Around the world, governments appear to be both shrinking and outsourcing many of their traditional functions to pri-vate parties, sometimes indirectly by devolving power to local gov-ernments that themselves depend heavily on private actors.1 In the United States, federal, state, and local governments now routinely employ contracts with private providers to furnish services, deliver benefits, and perform significant (and sometimes traditionally “pub-lic”) functions.2 Less visibly, a number of federal agencies have begun

* Professor of Law, University of California Los Angeles. I am grateful to Ann Carl-son, Michael Asimow, Sharon Dolovich, Dan Guttman, Gillian Lester, Jim Rossi, J.B. Ruhl, Jim Salzman, Mark Seidenfeld and the participants in this symposium for helpful com-ments on earlier drafts. The article benefited as well from a workshop at the Washington College of Law at American University. Thanks to Joanna Wolfe for excellent research as-sistance. Jason Kellogg deserves credit for enormous editorial patience. Errors and omis-sions are mine.

1. See generally SHEILA B. KAMERMAN & ALFRED J. KAHN, PRIVATIZATION AND THE WELFARE STATE (1989).

2. Public sector reform in Britain has resulted in significant government downsizing and contracting out. SeeKIERON WALSH, PUBLIC SERVICES AND MARKET MECHANISMS at xi (1995); see also Murray Hunt, Constitutionalism and the Contractualisation of Government in the United Kingdom, in THE PROVINCE OF ADMINISTRATIVE LAW 21 (Michael Taggart

155


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

experimenting with contractual approaches to regulation as well, sometimes pursuant to statutory mandates, and other times as part of agency enforcement discretion.3 Governments increasingly act in all of their capacities, it seems, via contractual devices.4

Despite the rising prominence of contract as an administrative and regulatory instrument, its implications for administrative law are not well understood. In this Article, I begin a much-needed dis-cussion of contractual governance by focusing on two species of con-tract—contracts to provide services or benefits (already well-entrenched in the United States) and regulatory contracts (a nascent, but noteworthy, development). I explain the practical and the theo-retical problems these contracts pose, chief among which is their po-tential to undermine accountability in decisionmaking.

Widespread contracting out of services or arguably “public” func-tions could have dire consequences under some circumstances—if legislatures systematically outsource their traditional functions and use contracts with private parties to insulate decisions from constitu-tional scrutiny, for example. Contracting could obscure traditional lines of accountability, enabling legislatures to take credit for doing little, while blaming private contractors for program failures.5

Moreover, even with the best intentions, legislatures and their agency delegates may lack the capacity to oversee compliance with contractual terms. Absent a procedural right to participate in con-tract negotiations, and without third-party rights of action, the bene-ficiaries of these contracts may be left with no avenues for participa-tion or redress. As a result, the pressure for government-private con-tracts to absorb public law norms of fairness, rationality, and ac-countability will only intensify if government increasingly employs them to provide important services and outsource its traditional functions. More broadly, widespread contracting out could wreak havoc with the balance of power among the branches of government: weakening the legislative and executive branches through fragmen-

ed., 1997). On the United Kingdom experience, see generally Peter Vincent-Jones, The Regulation of Contractualisation in Quasi-markets for Public Services, 1999 PUBLIC LAW 304. In many countries, privatization has taken the form of selling state assets to the pri-vate sector. See JOHN D. DONAHUE, THE PRIVATIZATION DECISION 6-7 (1989). In the United States, where historically fewer assets have been state-owned, privatization has consisted of contracting out and devolving power, as well as streamlining government activity. See id. at 6-8.

3. See Jody Freeman,The Private Role in Public Governance, 75 N.Y.U. L. REV. 543, 636-38 (2000).

4. See id. at 548.
5. Some commentators believe that this already describes a good deal of governance.
See, e.g., JOEL F. HANDLER, DOWN FROM BUREAUCRACY (1996).


CONTRACTING STATE 157

tation and delegation, and overburdening the judiciary with chal-lenges to contractual schemes.6

Contractual regulatory instruments raise different, but equally serious concerns. The possibility that governments might negotiate regulatory standards with the entities they are empowered to regu-late strikes most traditional administrative law scholars as anath-ema—a recipe for either corporatism or capture. Treating regulations as enforceable contracts could require governments to unilaterally absorb the costs of changing conditions, or bind governments to the bad bargains of their predecessors, a possibility that no longer seems remote in light of recent Supreme Court jurisprudence.7

Some commentators might think that regulatory contracts are in-sufficiently similar to the phenomenon of contracting out to merit in-clusion in a larger category of contractual instruments of governance. In this view, contractual regulatory instruments emerge for distinct reasons and cause different problems than widespread contracting out.8 Indeed, administrative law scholars tend to treat contractual regulatory instruments as mere instances of agency discretion: op-tional implementation tools designed to achieve the agency’s ulti-mate goal. If the regulatory goal is lawful, and the agency’s exercise of discretion remains within permissible bounds, then the use of con-tract (as opposed to any other tool) as a method of implementation seems unobjectionable. Seen in this light, contractual regulatory tools raise familiar problems best solved by familiar measures. The legislature might bar the use of contract through constraints on agency discretion or specifically authorize the agency to use contract as an implementation option. Either way, the issue is discretion; con-tract is decidedly secondary.

Not all instances of discretion are alike, however, and the full im-plications of these tools might best be glimpsed through the prism of

6. See David Mullan, Administrative Law at the Margins, in THE PROVINCE OF ADMINISTRATIVE LAW, supra note 2, at 155-56 (arguing that judicial review may intensify in response to privatization).

7. See United States v. Winstar Corp., 518 U.S. 839 (1996). I discuss this case in de-tail. See infra notes 229-49 and accompanying text.

8. I thank Mark Niles and Jim Salzman for raising this objection to the inclusion of regulatory contracts. They point out that the trend toward contracting out may have emerged for different reasons than the trend toward using contract to implement regula-tion, and they argue that this distinction ought to make a difference. Indeed, contracting out may be a response to tightening government budgets, a generalized public antipathy toward government, and the increasing ideological appeal of the market, whereas the emergence of regulatory contracts might be explained by the need for greater flexibility in executing regulatory responsibilities. To put a fine point on it, resorting to contractual regulatory approaches might be nothing more than a few agencies’ defensive reaction to a Republican Congress that disfavors environmental and health and safety regulation. Even if this is true, however, the contractual nature of these innovations—and their emergence at a time when other contractual approaches are also becoming widespread—bears noting, and has some important implications for administrative law.


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

contract. Regulatory contracts pose unique problems for administra-tive law. Among other things, they depend heavily on private actors that tend not to be bound by constitutional or administrative law constraints.9 Unlike the agency discretion perspective, the contrac-tual lens brings this dependence on private actors, and its attendant risks, into focus. It also highlights the potential conflict between the government’s role as authoritative regulator and its role as contract-ing partner, which even explicit legislative authorization cannot re-solve. Finally, the contractual prism foregrounds the ways in which contract, as a particular mode of decisionmaking, might uniquely ob-struct or facilitate public participation.

Thus, the conceptualization of seemingly different types of con-tracts as a family of related tools is meant to supplement, rather than displace, other useful perspectives. It treats contractual regula-tory tools not merely as potentially problematic instances of discre-tion, but as part of an emerging “contract culture”—a trend toward fragmented and decentralized governance that includes, but is not limited to, contracting out government functions. Among other things, that trend may impose great pressure on courts to reconcile principles of private contract law, which do not necessarily afford agencies deference, with principles of administrative law, which do.10

At the same time, despite their significant risks, government-private contracts of all types might nonetheless produce important benefits that we should not overlook. The rise of contract may signal not so much the retreat of the state as a reconfiguration of the state’s role in governance. That reconfiguration could conceivably amount to a net gain in accountability, or at least not a net loss. In an era of greater private involvement in every facet of administration and regulation, contracts can themselves function as potentially crucial accountability mechanisms.11 For example, contractual provisions may allow third-party beneficiaries to hold the contracting parties to

9. See Freeman, supra note 3, at 574-591 (describing the extent to which private ac-tors escape constitutional and other legal constraints). The Administrative Procedure Act, 5 U.S.C. 551-559, 701-706 (1994 & Supp. V 1999), specifically exempts government con-tracts from the procedural requirements of notice and comment. See 553 (a)(2).

10. See WALSH, supra note 2, at 136-37 (referring to the emergence of a contract cul-ture); see also DONAHUE, supra note 2, at 6-8. See generally GENERAL ACCOUNTINGOFFICE, GAO/HEHS-98-6, SOCIAL SERVICE PRIVATIZATION: EXPANSION POSES CHALLENGES IN ENSURINGACCOUNTABILITY FOR PROGRAM RESULTS (1997) (documenting expanded privati-zation of social services and analyzing implications for accountability), available at http://www.access.gpo.gov/su_docs/aces/aces160.shtml.

11. Although private parties have always shared responsibility for governance to greater or lesser degrees, their roles have diversified and expanded, sometimes into terri-tory once regarded as the exclusive province of the state. See generally Freeman, supra note 3. In light of this expansion of private authority, some scholars have argued that there is no longer a justification for treating public and private power differently: that we ought to constrain the private exercise of discretion just as we do public agencies. See id. at 574-75.


CONTRACTING STATE 159

their commitments. Contracts could also enable government agencies to accomplish indirectly what, for legal or political reasons, they can-not achieve directly. As with grants-in-aid between the federal and state governments, public-private contracts could be a means of ex-tending government priorities and policies to private actors, and of exacting concessions and gains that might otherwise be beyond the government’s regulatory reach.

Like settlements, regulatory contracts could provide the parties more flexibility than does the formal enforcement process. This flexi-bility accrues of course not only to the private contracting party, but to government as well. Through regulatory contract, private actors may agree to conform to substantive regulatory requirements or adopt procedural norms that are otherwise inapplicable to them or unenforceable against them. In addition, regulatory contracts might function as disclosure mechanisms that identify and specify regula-tory goals, which might in turn enable both government overseers and third-party auditors to monitor progress toward those goals. Un-der the right circumstances then, regulatory contracts could prove at least no less effective and democratic than other regulatory instru-ments.

Whether one welcomes or fears the rise of contract as an adminis-trative and regulatory tool, however, existing doctrines and theoreti-cal frameworks will need to adapt to its emergence. Contractual in-struments pose a host of doctrinal and theoretical problems for which administrative law provides no ready answers. Administrative law theory has yet to explore, let alone internalize, such a contractual model of governance. Each of the competing theories of the field— public interest,12 pluralist,13 civic republican,14 and public choice15— consists at its core of a distinctive understanding of the agency’s function16 and a unique justification for judicial review, but they

12. See, e.g., Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV. L. REV. 1667, 1763 (1975) (describing public interest theory as aimed at advocat-ing representation of “widely diffused” interests that otherwise would not prompt indi-viduals to undertake litigation).

13. See id. at 1760-61 (noting the emergence of public participation in agency deci-sionmaking as a way to improve decisions and increase public participation in the process).

14. For a representative civic republican account, see Mark Seidenfeld, A Civic Re-publican Justification for the Bureaucratic State, 105 HARV. L. REV. 1511 (1992).

15. See, e.g., Mathew D. McCubbins et al., Administrative Procedures as Instruments of Political Control, 3 J.L. ECON. & ORG. 243 (1987) (noting that in the absence of over-sight, agency officials are likely to make decisions reflecting personal preferences derived from private political values, personal career objectives, and aversion to effort).

16. They are, respectively, an institution devoted to implementing legislation in the public interest, see Freeman, supra note 3, at 558-59; a broker of stakeholder interests, see id. at 559-60; an expert body deliberating in a public-regarding way, see id. at 559; or an agent of self-interested legislators, see id. at 561-63.


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

share a hierarchical vision of governance.17 A conception of the gov-ernment agency as “contracting partner” fits comfortably with none of these accounts. As a result, the complement of oversight mecha-nisms currently envisioned by these theories to constrain agency ac-tion might be inadequate—or wholly inappropriate—for the problems that arise in the contracting state.18

In Part II of this Article, I describe how privatization trends in the United States have created an environment in which public-private contracts are likely to flourish. The bulk of the Article is devoted to the two species of such contracts that appear to pose the most diffi-culty for administrative law—contracts for social services and regu-latory contracts. In Parts III and IV, I provide examples of contracts for social services and regulatory contracts, respectively, and discuss the most frequent objections to them. I argue in Part V that despite the risks they pose, both kinds of contracts offer some attractive benefits, and I explore in particular their potential to function as ac-countability mechanisms. I conclude by describing how these ar-rangements could create an uncomfortable confrontation between public law principles of deference to agency action and private law principles of contract interpretation.

    II. PRIVATIZATION


The rise of contract as an administrative and regulatory instru-ment in the United States has occurred in the context of a global pri-vatization movement in which governments around the world have privatized state industries and undergone significant public sector reform.19 Over the last twenty years, following the Thatcher govern-ment’s lead in Great Britain, numerous liberal democracies such as New Zealand, Australia, and Canada have adopted aggressive re-forms aimed at developing markets for the provision of most social services, including education, health care, job training, housing, mu-nicipal services, and the like.20 The privatization of state industries

17. With the possible exception of public choice theory, which is arguably more ex-planatory than normative. It is not difficult to imagine normative proposals that might flow from the public choice account, however. For more on public choice theory’s impact on administrative law, see Freeman,supra note 3.

18. While somewhat helpful as a starting point, the law governing traditional gov-ernment procurement of goods and services addresses only a narrow subset of government contracts. The procurement framework is either imperfect or wholly unsuitable for re-sponding to the more widespread use of contract to deliver services or perform arguably public functions. At the same time, the law governing the interpretation and enforcement of regulatory contracts remains in flux. See United States v. Winstar Corp., 518 U.S. 839 (1996).

  19. See DONAHUE, supra note 2, at 6-7.
20.
See WALSH, supra note 2, at 26 (describing the five major mechanisms that make up public sector reform: user charges for services, opening services to competitive tender-


CONTRACTING STATE 161

together with the shift to internal markets, competitive tendering, and contracting out has created new relationships between public and private actors in these countries and forced governments to de-vise measures for structuring and monitoring the new arrange-ments.21 Kieron Walsh describes the result as a form of organization that is “neither market nor hierarchy, but which lies rather uncom-fortably between the two.”22 These trends might be described as a shift from hierarchical relationships to contractual ones.23

In the United States, the privatization movement has primarily taken the form of increased contracting out of government services, devolution, and streamlining government.24 These three develop-ments have occurred simultaneously, and they have been mutually reinforcing. Although privatization has developed into an ideological movement in the United States only in the last twenty years, relying on the private sector to perform “public” functions as a practical mat-ter has a long history.25

Since at least the post-war period, the federal government, along with state and local governments, has increasingly depended on pri-vate contractors to provide a wide variety of goods and services not only for government consumption but for public consumption as well, from weapons systems to environmental impact statements to social services, including health care, welfare, day care, job training, infra-structure maintenance, and waste collection.26 The trend toward pri-vatizing social services has accelerated and intensified in the last two decades, however, as a result of a concerted effort by the federal gov-ernment (beginning with the Reagan Administration) to devolve power to lower levels of government and spur the private provision of

ing or contracting out work, introducing internal markets, devolving financial control, and establishing parts of the organization on an agency basis).

21. In the United Kingdom and elsewhere, the state engages in three primary modes of contracting: internal contracting, competitive tendering, and the contracting out of se r-vices. See id. at 121.

22. Id. at xviii.
23.
See id. (observing that “[a]uthority relations are being redefined as contracts” and that “[t]he public service is becoming a more or less integrated network of organisations that relate through contract and price rather than authority”).

24. See DONAHUE, supra note 2, at 6-8.
25.
See LESTER M. SALAMON, PARTNERS IN PUBLIC SERVICE 5 (1995).
26.
See id. at 5-6, 42-43. Until recently, contracts for health, welfare, and similar so-cial services primarily went to nonprofits. See id. at 5. This has begun to change, however, as economic conditions make social welfare delivery increasingly attractive to for-profit firms. See id. at 10. For-profit participation has been on the rise in recent years. For-profit nursing homes increased 140% between 1960 and 1976. See Eleanor D. Kinney, Private Ac-creditation as a Substitute for Direct Government Regulation in Public Health Insurance Programs: When Is It Appropriate?, LAW & CONTEMP. PROBS., Autumn 1994, at 47, 51. By 1980, more than 90% of nursing homes were privately owned. See Patricia A. Butler, As-suring the Quality of Care and Life in Nursing Homes: The Dilemma of Enforcement, 57 N.C. L. REV.1317, 1337 n.96 (1979).


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

publicly financed services.27 Notably, during this period the percent-age of for-profit organizations involved in service delivery has ex-panded and the universe of functions thought suitable for privatiza-tion appears to have enlarged.28 Both the federal and state govern-ments have turned to for-profit firms to run detention centers and prisons for example, a function once thought to be the exclusive prov-ince of government.

The devolution of authority from federal to state and local gov-ernments has contributed to the rise of contracting out, as lower lev-els of government turn to private actors in order to help execute their new responsibilities. Welfare reform offers a recent example of this phenomenon. The Personal Responsibility and Work Opportunity Reconciliation Act of 199629 (PRA)—which abolished the federal enti-tlement to financial assistance known as Aid to Families with De-pendent Children, providing instead a system of block grants to the states30—seems to be intensifying the privatization of benefits ad-ministration in at least some states.31 Similarly, the devolutionary aspects of the Balanced Budget Act of 199732 appear to have acceler-ated state reliance on private organizations, including managed care organizations, to deliver care to the Medicaid population.33

At the same time, recent efforts by the Clinton Administration to streamline government and promote “public-private partnerships” seem likely to foster greater reliance on private sector institutions. Vice President Gore’s high profile effort to “reinvent” government, adopted in the National Performance Review, cut the budgets of ex-

27. See SALAMON, supra note 25, at 6-8; John J. DiIulio, Jr. & Richard P. Nathan, In-troduction to MEDICAID AND DEVOLUTION 1(Frank J. Thompson & John J. DiIulio, Jr. eds., 1998)(referring to the 1990s as “the decade of devolution”).

28. See SALAMON,supra note 25, at 42-43.


29. Pub. L. No. 104-193, 110 Stat. 2105.
30.
See id. 103(a), 110 Stat. at 2112-60 (codified as amended at 42 U.S.C. 601-619 (Supp. V 1999)). The Act attaches relatively few conditions to the block grants and allows states to design benefit programs and eligibility requirements. See id.

31. See David J. Kennedy, Due Process in a Privatized Welfare System, 64 BROOK. L. REV. 231, 231 (1998) (describing the PRA, which allows states to use private corporations to operate benefit programs).

32. Pub. L. No. 105-33, 111 Stat. 251.
33. In addition to increasing state flexibility to set payment levels,
see id. 4711-4715, 111 Stat. at 507-09 (codified as amended at 42 U.S.C. 1396a to 1396r-7), the Act allows states to mandate enrollment in managed care programs without applying for fed-eral waivers. See 4702(a), 111 Stat. at 494-95 (codified as amended at 42 U.S.C. 1396d(a), 1396d(t)). The waiver process had enabled rigorous federal oversight of state re-liance on managed care organizations serving the Medicaid population. See MEDICAID AND DEVOLUTION, supra note 27, at 122. The authors argue that devolution is a complex, in-cremental process, and that it ought not to be defined as wholesale federal withdrawal from a policy field. See id. at 7. Enhanced state flexibility over the Medicaid program has coincided with the general shift from fee-for-service to managed care, and that shift has in-troduced new players (such as Managed Care Organizations) into the Medicaid regime. The combination of devolution and managed care has enhanced the already significant role that contract plays in securing compliance with Medicaid program requirements.


CONTRACTING STATE 163

ecutive agencies across the board, streamlined bureaucracies34 through a variety of measures, and sought to promote regulatory in-novation in the form of consensus-based decisionmaking and public-private partnerships.35 As both a rhetorical and a practical matter, these measures invite increased reliance on the private sector.

This combination of events—contracting out, devolution, and pub-lic sector reform—has created an environment in which public-private contract seems likely to flourish. And although commentators have debated the merits of privatization from an economic and politi-cal perspective36 and sought to identify the conditions under which privatization will produce efficiency gains,37 the implications of priva-tization for administrative law remain unclear. At first blush, con-tractual instruments might strike administrative law scholars as un-interesting or unproblematic. They do not appear to disrupt settled categories of agency action, challenge established explanations of the administrative process, or impugn traditional justifications for judi-cial review.38 However, government-private contracts have the poten-

34. See The Federal Workforce Restructuring Act of 1994, Pub. L. No. 103-226, 108 Stat. 111 (1994) (codified as amended in scattered sections of 5 U.S.C.) (requiring a redu c-tion of 272,900 civilian jobs by the end of fiscal year 1999). The federal civilian work force has decreased from 2.16 million full-time equivalents (FTE) in 1993 to 1.8 million FTEs in 1998, a decrease of 360,000 FTEs. See OFFICE OF MANAGEMENT & BUDGET, ANALYTICAL PERSPECTIVES, BUDGET OF THE UNITED STATES GOVERNMENT, FISCAL YEAR 2000, at 247 (1999) [hereinafter ANALYTICAL PERSPECTIVES], available at http://w3.access.gpo.gov/ usbudget/fy2000/pdf/spec.pdf.

35. See, e.g., OFFICE OF THE VICE PRESIDENT, ACCOMPANYING REPORT OF THE NATIONAL PERFORMANCE REVIEW: ENVIRONMENTAL PROTECTION AGENCY 23-27, 51-52 (1993) [hereinafter EPA ACCOMPANYING REPORT] (companion document to VICE PRESIDENT ALGORE, FROM RED TAPE TO RESULTS: CREATING A GOVERNMENT THATWORKS BETTER AND COSTS LESS (1993)), http://www.npr.gov/library/reports.epa.html; VICE PRESIDENT ALGORE, FROM RED TAPE TO RESULTS: CREATING A GOVERNMENT THATWORKS BETTER AND COSTS LESS: REPORT OF THE NATIONAL PERFORMANCE REVIEW passim (1993), http://www.npr.gov/library/nprrpt/annrpt/redtpe93/index.html.

36. See,e.g., Andrei Shleifer, State Versus Private Ownership, J. ECON. PERSP., Fall 1998, at 133, 141-44 (1998) (analyzing politics of government ownership and privatization and noting that political considerations not only strengthen the case for privatization, but in fact drive the decision to privatize); see also DONAHUE, supra note 2, at 11-12 (arguing that the values of efficiency and accountability of public and private arrangements in “o r-ganizational architecture” should be reorganized in a way that will best deliver public goods and services). Privatization does not guarantee accountability; however, in some cases, private ownership has reduced access to information that was more easily available under public ownership. See C. Graham & T. Prosser, “Rolling Back the Frontiers”? The Privatisation of State Enterprises, in A READER ON ADMINISTRATIVE LAW 63, 80-86 (D.J. Galligan ed., 1996); see also HANDLER, supra note 5, at 86-90 (discussing public-private contracts that lack competition and causea decrease in efficiency and accountability).

37. See, e.g., DONAHUE,supra note 2, at 56-78.
38. Much administrative law scholarship consists of debates over statutory interpre-tation and standards of judicial review of agency action.
See, e.g., Colin S. Diver, Statutory Interpretation in the Administrative State, 133 U. PA. L. REV. 549 (1985); Richard J. Pierce, Jr., Chevron and Its Aftermath: Judicial Review of Agency Interpretations of Statutory Pro-visions, 41 VAND. L. REV. 301 (1988). Another significant body of administrative law con-cerns itself with the advantages and disadvantages of legislative controls, both formal and


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

tial to do all three. In an era in which private actors play significant roles in every aspect of governance,39 contract is both a crucial ad-ministrative policy instrument and a potential source of accountabil-ity.

  III. GOVERNMENT-PRIVATE CONTRACTS


Procurement contracts for goods and services are the most famil-iar form of government contracting and, ironically, the least prob-lematic from an administrative law perspective.40 As a matter of course, all levels of government contract with private providers for goods and services, ranging from weapons systems to office supplies. The federal government has established an elaborate body of pro-curement law that governs such purchases.41 It consists of a highly detailed bidding, award, and contract management process. Of all the “contract-like” arrangements into which government enters, pro-curement contracts most closely resemble traditional commercial contracts. And yet, federal procurement requires contractors to follow strict, government-unique product specifications and contract rules and regulations.42 Indeed, despite their apparent similarity to com-

informal. See, e.g., Stephen Breyer, The Legislative Veto After Chadha, 72 GEO. L.J. 785 (1984); see also Mathew D. McCubbins et al., supra note 15.

39. For examples, see Freeman, supra note 3, at 547. See also SALAMON, supra note 25, at 42 (describing the phenomenon of “third-party government,” in which government depends on a host of third-party institutions to carry out its missions). Administrative law theory has largely ignored the private role in governance, focusing instead on the relation-ships among legislatures, agencies, and courts. For an explanation of the roots of agency-centered analysis, see Jody Freeman, Private Parties, Public Functions and the New Ad-ministrative Law, reprinted in 52 ADMIN L. REV. 813, 816-17 (2000). See also Vincent-Jones, supra note 2, at 311-12 (conceiving of the problem of regulation in terms of deploy-ment and interaction of a variety of regulatory resources “fragmented and dispersed among . . . state and non-state bodies”).

40. This is not to say that the procurement process functions efficiently or account-ably. Federal military procurement has been famously corrupt and inefficient. See DONAHUE, supra note 2, at 101-03.

41. Procurement contracts must conform to elaborate statutory and regulatory re-quirements. The principal requirements are contained in Titles 10 and 41 of the United States Code, see 10 U.S.C. 2202, 2301-2331 (1994); 41 U.S.C. 251-266 (1994 & Supp. IV 1998), and the Federal Acquisition Regulation (FAR), 48 C.F.R. ch. 1 (1999). The Title 10 provisions cover procurement by the Armed Forces, Coast Guard, and NASA. See 10 U.S.C. 2303. The Title 41 provisions cover procurement by the federal government gen-erally and executive agencies. See 41 U.S.C. 252. The FAR establishes highly detailed procedures that govern every aspect of the procurement process including notice, competi-tion, award, contract method, and contract management. See 48 C.F.R. pt. 1 (1999). In ad-dition, each federal agency has been given authority to promulgate supplementary regula-tions that apply to its own procurement process. See 48 C.F.R. 1.301(a) (1999). Chapter 16 of Title 40 establishes the General Services Administration and gives the Administrator of that agency the power to prescribe procurement regulations for the federal government. See 40 U.S.C. 751 (1994).

42. See sources cited supra note 41. The regime has attracted substantial criticism for overly burdening companies doing business with the government and for unnecessarily in-flating prices and wasting taxpayer money. See Christopher F. Corr & Kristina Zissis,


CONTRACTING STATE 165

mercial contracts, procurement contracts consistently favor govern-ment in a number of ways, by permitting termination for conven-ience, for example, and by limiting the remedies available to private contractors in the event of government breach.43

Although fraud and abuse frequently occur in the procurement process, as a conceptual matter, contracts to purchase “commercial” goods and services directly for government consumption are less troubling to administrative law than two other kinds of contracts: those that allow private actors to provide services for third parties and those that enable contractors to play significant roles imple-menting laws or otherwise performing the work of government agen-cies. The traditional procurement model, which consists of a highly technocratic approach to contract design—detailed specifications, elaborate procedures, formal agency supervision—may be somewhat amenable to controlling the excesses of commercial procurement, but it may be too limited to address the much more substantial issues that arise when government contracts out social services and tradi-tionally governmental functions.

Moving away from procurement of goods for government con-sumption, we see that all levels of government contract with private providers for the delivery of social services and benefits such as health care, welfare benefits, job training, day care, and education.44

Convergence and Opportunity: The WTO Government Procurement Agreement and U.S. Procurement Reform, 18 N.Y.L. SCH. J. INT’L & COMP. L. 303, 314 (1999); Steven Kelman, Buying Commercial: An Introduction and Framework, 27 PUB. CONT. L.J. 249, 250-51 (1998). In response to such criticisms, Congress passed the Federal Acquisition Streamlin-ing Act of 1994, Pub. L. No. 103-355, 108 Stat. 3243 (codified as amended in scattered sec-tions of 10, 15, and 41 U.S.C.), and the Federal Acquisition Reform Act of 1996 (FARA), Pub. L. No. 104-106, Div. D, 110 Stat. 186, 642 (codified as amended in scattered sections of 10, 15, 18, 22, 31, and 41 U.S.C.), to simplify acquisition procedures and decrease pro-curement of government-specific products by increasing commercial purchases. FARA spe-cifically called for the full and open competition requirements governing procurement to be balanced with efficiency. See FARA 4101(a)(2) (codified at 10 U.S.C. 2304(j) (Supp. V 1999); Patrick E. Tolan, Jr., Government Contracting with Small Businesses in the Wake of the Federal Acquisition Streamlining Act, the Federal Acquisition Reform Act, and Ada-rand: Small Business as Usual?, 44 A.F. L. REV. 75, 79-80 & n.28 (1998).

43. See Gillian Hadfield, Of Sovereignty and Contract: Damages for Breach of Con-tract by Government, 8S. CAL. INTERDISC. L.J. 467, 488-95 (1999).

44. See, e.g., BURTON A. WEISBROD, THE NONPROFIT ECONOMY (1988); see also DONAHUE, supra note 2, at 179, 219-20 (discussing job training and health care contracts between government and private providers); SALAMON,supra note 25, at 10 (describing the growth of for-profit organizations in the social welfare field). Although secondary school education is still largely publicly provided, there are increasing trends toward privatiza-tion. California education secretary Gary Hart said recently that one of the major issues facing primary and secondary education is “the trend toward privatization.” Gary Hart, Presentation Before the UCLA Faculty of Law (Sept. 18, 2000). Not only is there a trend toward contracting out services like bus transportation and computer services, but gov-ernments are also contracting out instruction. For example, a San Diego organization called AVID provides half of all California high schools with a college prep curriculum aimed at low-income students. Seeid.


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

Private actors also provide amenities such as water and power and furnish basic municipal services such as waste collection.45 To fully appreciate the context in which contracting out of this sort has flour-ished, one must understand federal grants-in-aid, which are the funding vehicles through which the federal government enables and encourages state and local governments to achieve its policy goals.46

Federal grants resemble contracts themselves47 but are more ac-curately described as conditional awards of funding.48 They are di-vided into mandatory and discretionary grants and again into cate-

I focus on the supply of such services rather than the demand for them (which might also be contracted out, i.e., government might just abandon its role in determining whether a service or function is needed). Although state and local governments may follow the pro-curement model when contracting with private providers to deliver these services or bene-fits, I distinguish these contracts from the traditional procurement context because the services are for the benefit of third parties; these are not goods and services for the gov-ernment’s own use.

45. The most widely privatized social service appears to be solid waste disposal. See Steven C. Deller, Local Government Structure, Devolution, and Privatization, 20 REV. AGRIC. ECON. 135, 136, 143 (1998).

46. Spending on grants has grown from $7 billion in 1960 to $135.3 billion in 1990 to $246.1 billion in 1998. Total federal grants as a percent of state and local expenditures has ranged from 19% in 1960 to a high of 31% in 1980 to 25% in 1998. See ANALYTICAL PERSPECTIVES, supra note 34, at 236. Medicaid is the largest grant program, receiving $101.2 billion in 1998. See id. at 244. The federal government also relies extensively on grants and cooperative agreements with states and local government to effect legislative and administrative purposes. See 31 U.S.C. 6304(1), 6305(1) (1994). These are known as “domestic assistance” contracts because they enable the federal government to carry out a “public purpose of support or stimulation authorized by a law of the United States.” Id. However, they are not contracts. Compare 31 U.S.C. 6304(1), 6305(1) (addressing grants and cooperative agreements), with 31 U.S.C. 6303 (1),(2) (1994)(addressing procurement contracts). See also PAUL G. DEMBLING & MALCOM S. MASON, ESSENTIALS OF GRANT LAW PRACTICE 12-13 (1991).

47. See DEMBLING& MASON, supra note 46, at 1-8. While analogous in some respects to contracts, grants are not, strictly speaking, contracts. They are domestic assistance ve-hicles—funding mechanisms through which the federal government enables and encour-ages state and local government to accomplish federal goals. Because federal grants offer conditional inducements, they allow the federal government to accomplish indirectly what it cannot mandate directly. In exchange for federal funding, recipient governments must comply with certain conditions, which vary with the type of grant.

Analyzing these agreements using conventional contract analysis proves limited. Among other things, they do not conform to the usual requirements of offer and acceptance. For example, sometimes the agency attaches special conditions to the grant after it accepts the application. Normally this would be a counter-offer, but in the world of grants, the agency’s conditional award constitutes acceptance. See id. at 82. As another example, judicial re-view of denials of discretionary grants is limited because of principles of deference to agency action that would not apply to two private parties. See id. at 78-79. Decisions to award discretionary grants are considered by courts to be informal policy making, a mode of agency action over which courts hesitate to tread too heavily. See id. at 79. In essence, the fact that one “contractual” partner is the government makes it difficult to interpret them using conventional contract analysis. See id. at 8, 82.

48. See, e.g., South Dakota v. Dole, 483 U.S. 203, 223 (1987). The procedures, condi-tions, remedies, enforcement, and overall administration of grants differ from the laws and regulations governing federal procurement contracts as well as from commercial contracts. See DEMBLING & MASON, supra note 46, at 3.


CONTRACTING STATE 167

gorical (narrow purpose) and block grants (wide purpose).49 Discre-tionary grants are authorized by statute to further a specific purpose, such as medical research or education, and are more likely to be di-rectly provided to nongovernmental (chiefly nonprofit) organiza-tions.50 Federal agencies do not possess the inherent power to enter grant agreements as they do procurement contracts. Instead, Con-gress must explicitly provide for grants in legislation and authorize appropriations for the grant. As a result, there is no uniform statu-tory framework for grants as there is for procurement and they are subject to a variety of government-wide and agency-specific condi-tions. These conditions derive not only from statutes but from execu-tive orders, agency regulations, grant policy manuals published by particular agencies,51 and recommendations from Office of Manage-ment and Budget (OMB) circulars.52

The grant system not only allows the federal government to ad-vance its substantive policy goals, but it also enables the federal gov-ernment to indirectly regulate state and local governments and ulti-mately to impose conditions on the private providers of social ser-vices. As a condition of grants, Congress can demand conformity with its socioeconomic policies (such as anti-discrimination, environ-mental, and labor standards) as well as administrative and fiscal policies (such as compliance with record-keeping and inspection and auditing requirements).53 The power of these tools as instruments of policy is particularly striking now, as the Supreme Court’s federal-ism jurisprudence makes direct federal regulation of the states in-creasingly difficult.54 Conditional inducements in the form of grants-in-aid fall within Congress’ Article I spending power.55 Because a

49. See DEMBLING & MASON, supra note 46, at 31.
50. Discretionary grants differ significantly from procurement contracts in that they permit agencies considerably more discretion in selecting grant awards, and accountability for compliance with their terms seems more contextually driven and ad hoc.
See id. at 69. Discretionary grants are also distinguishable from procurement contracts in that they of-ten amount to investments under conditions of uncertainty. See id. at 70.

51. See, e.g., DEPARTMENT OF HEALTH AND HUMAN SERVS., GRANTS ADMINISTRATION MANUAL (1988), http://www.hhs.gov/grantsnet/admins/gam/gamanual.htm.

52. By statute, mandatory grants entitle an applicant to the grant if the applicant meets specified criteria. See DEMBLING & MASON, supra note 46, at 33. Termination or de-nial of nondiscretionary grants often entitles potential recipients to a formal trial-type hearing before an administrative law judge. Discretionary grants do not typically offer such procedural remedies.

53. For example, in Dole, 483 U.S. 203, the Supreme Court held that Congress’s use of conditional grants to indirectly encourage states to conform to national concerns like a uni-form drinking age was a valid use of its spending power.

54. See Printz v. United States, 521 U.S. 898, 935 (1997) (holding that Congress can-not circumvent New York by commanding state officials to enforce a federal regulatory program); New York v. United States, 505 U.S. 144, 149 (1992) (holding that the federal government cannot compel a state to take title to its radioactive waste).

55. See U.S. CONST. art. I, 8, cl. 1. Congress can regulate state policy indirectly through the inducement of federal money. The spending power is not, however, unlimited.


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

conditional grant is a “carrot” that a state can refuse, rather than a “stick” that it cannot, even heavily conditional grants that require states to pass legislation are not considered to be unconstitutionally “coercive” intrusions into state sovereignty.56 Much of this indirect regulation would undoubtedly be struck down by the Court if it were imposed directly. Thus, the grant conditions themselves become po-tentially critical accountability mechanisms in an era of privatiza-tion. They offer the federal government residual control over state and local governments which must, in turn, regulate private grant recipients to ensure that they comply with the grant conditions. The grant device effectively enables the federal government to purchase services for the benefit of third parties and regulate the delivery of the services simultaneously.57

For example, when a state wishes to receive federal Medicaid funding, it must file a state plan that assures compliance with vari-ous provisions of the Social Security Act, the Balanced Budget Act, and a host of federal regulations promulgated by the Department of Health and Human Services (HHS).58 Compliance with these re-quirements is a condition of receiving the program funds. Among other things, federal regulations include requirements that apply to contracts between the state agency and the private institutions that ultimately deliver health care, including hospitals and managed care organizations (MCOs).59

The Supreme Court has articulated a four-prong test for assessing the constitutionality of a conditional grant pursuant to the spending power: the power must be exercised in pu r-suit of the general welfare; the conditions must be unambiguously stated; the conditions must relate to a federal interest in particular national projects or programs; and Congress cannot induce states to engage in activities that would themselves be unconstitutional. See Dole, 483 U.S. at 207-08 (upholding a statute conditioning the receipt of highway funds on adoption of a minimum drinking age of 21). The Court has struck down a conditional grant only once. See United States v. Butler, 297 U.S. 1, 68 (1936) (invalidating a statute author-izing payments to farmers who agreed to curtail acreage or production). The curtailment scheme in Butler went “beyond the presumptive powers of Congress.” Albert J. Rosenthal, Conditional Federal Spending and the Constitution, 39 STAN. L. REV. 1103, 1126 (1987). Subsequent case law backed away from the Butler holding. See id. at 1113; see also Kath-leen M. Sullivan, Unconstitutional Conditions, 102 HARV. L. REV. 1415, 1415 (1989) (de m-onstrating that the Court has subjected conditions that interfere with individual rights to heightened scrutiny). Conditioned grants are a staple of cooperative federalism and are common in environmental statutes. For example, section 179 of the Clean Air Act condi-tions receipt of federal highway funds upon compliance with the Act. See 42 U.S.C. 7509 (1994). But see Cass R. Sunstein, Is the Clean Air Act Unconstitutional?, 98 MICH. L. REV. 303 (1999).

56. See Dole, 483 U.S. at 211-12 (differentiating between financial “encouragement” and financial “coercion”).

57. This duality of roles is not insignificant. See Michael W. Graf, The Determination of Property Rights in Public Contracts After Winstar v. United States: Where Has the Su-preme Court Left Us?, 38NAT. RESOURCES J. 197, 206 (1998) (noting the “two distinct gov-ernment contractual models”—government as “market participant” and government as regulator—and criticizing Winstarfor failing to distinguish them).

58. See 42 U.S.C. 1396 (1994); 42 C.F.R. pts. 430-56 (1999).
59.
See 42 C.F.R. pt. 434 (1999).


CONTRACTING STATE 169

The relationship between the federal agency responsible for Medi-caid oversight (the Health Care Financing Administration) and the doctors and nurses who ultimately provide health care to Medicaid eligible patients is therefore highly attenuated. However, it is through a series of contractual agreements—federal government with state, state with health care institutions, and institutions with providers—that the federal government exercises coercive power over health care delivery.

In addition to providing the funding stream for contracts that de-liver social services to third-party beneficiaries, government grants also enable large transfers of money to private contractors to perform executive work that we associate with the “civil service.”60 Numerous federal agencies rely heavily on a private work force to assist them in implementing laws and regulations.61 While I focus in this Article on services and functions that contractors deliver directly to third-party beneficiaries, the extent to which agencies rather invisibly rely on private actors to execute their every day functions of policy making and implementation warrants attention as well. Among other things, private contractors remain relatively unencumbered by the conflict of interest and other ethical rules that apply to civil servants.62

  A. Objections to Contracting Out


1. Consequentialist Concerns
Typically, one’s enthusiasm for contracting out turns on a host of considerations, most of which could fairly be labeled “consequential-ist” because they are motivated solely by a concern about the results of contracting out,63 rather than whether contracting out conforms to a set of a priori principles of “moral” action.64 That is, the objection to contracting out would disappear if it were possible to ensure favor-able results, such as cost savings without a concomitant decline in quality.

60. See Daniel Guttman, Public Purpose and Private Service: The Twentieth Century Culture of Contracting Out and the Evolving Law of Diffused Sovereignty, 52 ADMIN. L. REV. 859, 863 (2000).

61. See id. at 875-76.


62. See id. at 894-95.
63. Consequentialism is the moral theory which holds that the rightness or wrong-ness of an action depends exclusively on the consequences generated by that action.
See Sharon Dolovich, The Ethics of Private Prisons 75 (Nov. 1999) (unpublished manuscript, on file with the Florida State University Law Review) (citing Bernard Williams, A Critique of Utilitarianism, in J.J.C. SMART & BERNARD WILLIAMS, UTILITARIANISM: FOR AND AGAINST 79 (1973) (describing consequentialism as a form of utilitarianism)).

64. See id. at 72-73 (distinguishing between consequentialist and deontological theo-ries of moral action).


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

In fact, for the most part, scholars do not question the legitimacy or “morality” of private service provision. Rather, the key question is whether privatization can deliver on its promised efficiency gains without sacrificing quality service. As a result, scholars are prone to note the host of factors—geographic, demographic, and economic— that can thwart efforts to achieve efficiency gains through contract-ing out. These include such problems as an absence of competition, a lack of opportunities for cost savings, or the small size of a market.65 In some cases, the task that government wishes to contract out may be too difficult to specify in a contract and, therefore, difficult to monitor. Because the case for privatization has sounded largely in the language of cost savings and, to some extent increased effective-ness, demonstrating whether these gains will in fact obtain has be-come both politically and practically important to the privatization movement. Those who support privatization on such instrumental, rather than ideological, grounds are advocates of what one scholar calls “pragmatic privatization.”66

Thus, opposition to contracting out may stem from worry about results alone, which is ultimately an empirical question. For exam-ple, one might oppose privatizing welfare benefits on the theory that it will not cut costs and might result in the “creaming” or “churning” of welfare recipients to limit the numbers of claimants.67 Similarly, one might oppose prison privatization on the theory that it will fail to ameliorate overcrowding and might in fact swell the prison popula-tion due to the incentives that private contractors face to maintain high numbers of inmates.

In a results-oriented framework, then, we would want to ensure that contracting out in fact produces the positive benefits we desire without producing the negative effects we seek to avoid. In the con-text of prison privatization, for example, we would prize cost savings and bureaucratic efficiency, and perhaps even superior performance in rehabilitation and recidivism, but we would fear degraded prison conditions and increased threats to inmate security. Assessing any one instance of contracting out requires that we pay attention to con-text: we would want to know more about the potential for efficiency gains and more about the trade-offs.

2. “Technocratic” Concerns
To some extent, objections to contracting out might be ameliorated by careful attention to contract design. Contracts could specify tasks

65. See Deller, supra note 45, at 149-50.
66. Harvey B. Feigenbaum & Jeffrey R. Henig,
The Political Underpinnings of Privatization: A Typology, 46WORLD POL. 185, 193-94 (1994).

67. For definitions of creaming and churning, see Kennedy, supra note 31, at 241-47.


CONTRACTING STATE 171

more clearly, detail procedures more thoroughly, and clarify respon-sibilities. Certainly, many public-private contracts suffer from these “technocratic” weaknesses. However, there is a limit to technocratic solutions. No matter how careful the drafter, some tasks are difficult to specify in contractual terms (for example, delivering quality health care or providing a safe environment for prisoners).68 For many im-portant services and functions contractual incompleteness is inevita-ble.69 No contract can be specific enough to anticipate any and all situations that a private provider might encounter. Instead, the con-tract becomes a framework and a set of default rules that will help direct future gap filling.70 In fact, contractual vagueness may be de-sirable in some circumstances, as, for example, when the parties are familiar with each other, have been repeat players, and have estab-lished trust.71 Even so, vagueness may impede meaningful monitor-ing.

For those functions that are easier to specify, agencies may be nonetheless ill-equipped to monitor performance, whether because of

68. A GAO report studied six governments’ (five states’ and one city’s) experiences with privatization. Government officials reported that contract monitoring is key and con-sists of both contract auditing, which ensures that contractors are paid and contract obli-gations are met, and technical or performance monitoring, which ensures that the contrac-tors meet the quantity and quality terms of the contract. Generally, performance monitor-ing is more difficult than contract auditing for several reasons. Government employees need training in order to perform sophisticated analysis and monitoring. Contract re-quirements need to be precise to allow effective monitoring. Whether a service’s objectives could be defined easily and measured for monitoring purposes factored into some states’ decisions to privatize the service. Also, all the state government officials noted that per-formance monitoring is the weakest link in their privatization activities. See GENERAL ACCOUNTING OFFICE, GAO/GGD-97-48, PRIVATIZATION: LESSONS LEARNED BY STATE AND LOCAL GOVERNMENTS 17 (1997), http://www.access.gpo.gov/su_docs/aces/aces160.shtml.

69. Even procurement contracts can be incomplete and vague, and although design specifications might change, for the most part, in the procurement context government is buying a definable product (an F-15, for example). On the frequency with which “construc-tive change” orders have historically been issued by government personnel supervising procurement contracts, see F. Trowbridge vom Baur,Differences Between Commercial Con-tracts and Government Contracts, 53A.B.A. J. 247, 250 (1967).

70. See Robert E. Scott, Conflict and Cooperation in Long-Term Contracts, 75 CAL. L. REV. 2005, 2024-25 (1987) (arguing that parties to long-term contracts negotiate adjust-ments to formal terms in order to adjust to changing conditions over the life of the con-tract), cited in William E. Kovacic, Law, Economics, and the Reinvention of Public Admini-stration: Using Relational Agreements to Reduce the Cost of Procurement Regulation and Other Forms of Government Intervention in the Economy, 50 ADMIN L. REV. 141, 148 n.25 (1998). For additional scholarship on the development of informal norms within formal contractual regimes, see generally Lisa Bernstein, Merchant Law in a Merchant Court: Re-thinking the Code’s Search for Immanent Business Norms, 144 U. PA. L. REV. 1765 (1996). This more recent work on social norms builds on a much older scholarship in the law and society tradition devoted to describing the relational dimensions of contractual regimes. See, e.g., Stewart MacCauley, Non-Contractual Relations in Business: A Preliminary Study, 28 AM. SOC. REV. 55 (1963).

71. See John T. Scholz, Cooperative Regulatory Enforcement and the Politics of Ad-ministrative Effectiveness, 85 AM. POL. SCI. REV. 115, 132 (1991) (reflecting on the condi-tions most conducive to flexible and cooperative enforcement strategies).


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

resource constraints or a lack of familiarity with contract manage-ment. Weak monitoring in turn makes it difficult to discern whether contracting out is producing the desired results. Of course, some of these problems are related. Government agencies may monitor in-adequately because the task described in the contract itself eludes definition. They might be unrelated, however. Agency staff may monitor poorly because of an absence of training, because their in-centives direct them toward other priorities, or because they are cor-rupt.

3. Ethical Concerns
More fundamentally, one might object to contracting out certain functions on moral grounds. Many people have a viscerally negative reaction to the idea that some government functions—those they view as symbolically important or inherently governmental—might be contracted out to private parties, notwithstanding the possibility that private actors may perform those functions more cost-effectively. Some draw the line at what they call “core” governmental func-tions—those believed to be at the heart of sovereignty, such as for-eign affairs, tax collection, national defense, and policing, for exam-ple.72 For them, the distinction turns on the belief that certain func-tions are traditionally the obligation of the state.73 The same impetus to reserve “core” functions to the state motivates the desire to keep the heart of regulatory power in the hands of government, thus al-lowing implementation, but not policy making, to be contracted out.

While there might be widespread agreement that a few functions (such as national defense) ought to be both financed and performed by the state, choosing where to draw the line between these and other nonessential or peripheral functions, and the reasons for draw-ing the line, remains a matter of debate. Different people would no doubt consider different functions to be the inherent responsibility of the sovereign; in addition to the four examples listed above, educa-

72. See, e.g., Oliver E. Williamson, Public and Private Bureaucracies: A Transaction Cost Economics Perspective, 15 J.L. ECON. & ORG. 306, 322-24 (1998) (explaining why for-eign affairs ought not to be privatized by focusing on the vague consideration of “probity” rather than “hold-up” and other transaction cost problems).

73. In fact, most so-called public functions are neither traditionally nor self-evidently inherently governmental. Private prisons predated public ones. Private police predated the public police. See David A. Sklansky, The Private Police, 46 UCLA L. REV. 1165, 1198-2000 (1999). Private charitable organizations predated the social insurance schemes of the New Deal. Nonetheless, some commentators believe that certain functions ought to be reserved to the state because of their moral and symbolic importance. See PRIVATEPRISONS AND THE PUBLIC INTEREST 155, 173, 176 (Douglas C. McDonald ed., 1990)(arguing that some func-tions, such as the incarceration function, are so inherently public that it is immoral to pri-vatize them). For an argument that the market is not an appropriate mechanism for pro-ducing and distributing collective goods such as education and health care, see MICHAEL WALZER, SPHERES OF JUSTICE: A DEFENSE OF PLURALISM ANDEQUALITY 86, 198 (1983).


CONTRACTING STATE 173

tion, civil and criminal adjudication, and even transportation plausi-bly merit inclusion in the “core” category.

Some commentators object to prison privatization on these grounds, arguing that criminal punishment, an expression of soci-ety’s moral condemnation, is a core state function—the kind of judg-ment that, in a democratic society, ought to be imposed by the state. In this vein, John DiIulio argues that incarceration is part of the state’s inalienable “duty to govern.”74 Sharon Dolovich similarly frames her objection to privatization in “expressivist” terms, claiming that prison privatization sends the wrong message about the values of a “liberal ethical society.”75

Whether we label such objections symbolic, ethical, traditionalist, deontological, or expressivist, the simple notion behind all of them is that contracting out certain functions is somehow corrosive of democ-ratic values. Absent a strong grounding in moral theory, these objec-tions can sound vague, tautological, and decidedly nonempirical, 76 es-pecially compared to the hard-nosed efficiency arguments of privati-zation advocates, but they are real and pervasive.77 Many people simply distinguish intuitively between those services and functions that might tolerably be assigned to private parties and those they be-lieve ought to be performed by government. An individual who cares little about whether her household garbage is collected by the city of New York or Acme Waste Corporation may feel quite differently about the identity of a prison guard or a police officer.78

On this score, the potential for coercion is an important considera-tion in whether we view contracting out as legitimate, and it merits singling out. Some functions allocate burdens as opposed to benefits. Commentators may believe that when people are forced by the state to suffer a burden, contracting out is particularly inappropriate, and that administering coercion in particular ought to be the job of the state. Because burdens can implicate civil liberties, safeguards on the exercise of authority and accountability are all the more impor-tant. Thus, when government contracts out the power to punish, just

74. John J. DiIulio, Jr., The Duty to Govern: A Critical Perspective on the Private Management of Prisons and Jails, in PRIVATE PRISONS AND THE PUBLIC INTEREST, supra note 73, at 173.

75. Dolovich,supra note 63, at 76.
76. Most functions that seem traditionally governmental, including tax collection, po-licing, and incarceration, were at one time or another performed by private individuals or organizations.
See DONAHUE, supra note 2, at 34 (commenting on the “tax farmers” of an-cient Rome and the historical proliferation of mercenary armies). To say that a function is “traditionally” or “inherently” governmental still requires an argument.

77. See, e.g., John J. DiIulio, Jr., What’s Wrong with Private Prisons, 92 PUB. INTEREST 61, 70-71 (1988); Dolovich, supra note 63, at 71 (articulating an “expressivist” critique of prison privatization that goes beyond “consequentialist” arguments about cost and quality).

78. On the history of private policing, see Sklansky,supra note 73, at 1165.


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

as when it delegates its coercive regulatory authority, we might worry more than when government contracts out responsibility for conferring benefits, such as publicly financed health care, education, or job training.

Consider, again, the difference between contracting out waste col-lection and prison operation. Although everyone has an interest in the proper collection of waste (particularly given the environmental and human health risks posed by improper collection, transportation, and disposal), this activity seems not to implicate civil liberties. We simply do not experience the waste collection function as coercive. For the most part, then, whether waste collection and services like it ought to be provided by government or private actors appears to be less a normative question and more a question of which institution can do a better job for less money. For a large percentage of services and functions then, we are more likely to ask the type of questions characteristic of the “pragmatic” view of privatization: Will the con-tractual regime be adequately competitive to ensure cost savings and high quality? Will the bidding process be corrupt? With this kind of function, the only relevant normative question might be whether the community is willing to trade labor losses for more efficient service.79

Realistically, however, there are few activities with as much po-tential for coercion as incarceration. Few social services or functions funded by government but provided by private parties raise as much alarm over civil liberties, even if they affect important interests. In-deed, incarceration is unique. As a society, we are still considering whether to proceed with the experiments in private prison manage-ment, and at least with this particular function, the federal and state governments might still turn back. By contrast, there is little chance of retreating from the private delivery of most social services. The public-private networks necessary to accomplish “public” ends have been developing for at least half a century, and they appear well en-trenched. In any event, there appears in the United States (and in-deed worldwide) to be little public appetite for relying directly on government itself to deliver most social services. In an era marked by antipathy toward government bureaucracy, neither technocratic nor ethical objections are likely to deter the trend toward contracting out.

4. Administrative Law Concerns


For the most part, I have argued, economists and public manage-ment scholars engaged in the privatization debates focus on the con-

79. See Graham & Prosser, supra note 36, at 63(noting that severe job losses have co-incided with privatization but falling short of arguing causation). Anticipating job losses or less favorable work conditions, public service employees unions raise the strongest obje c-tions to such privatization schemes. See id.


CONTRACTING STATE 175

ditions under which private provision will offer greater efficiency than direct government provision. The goal of this results-oriented inquiry is to identify the economic conditions that might obstruct government efforts to structure privatization most effectively.80 In this view, technocratic problems of contract design are thought to be fairly and easily solved with more careful drafting and greater speci-ficity. Accountability arises, if at all, as one of these technocratic problems that might be addressed by a tweak of drafting and design; formal agency oversight usually suffices for accountability.81

However, contracting out presents serious and complicated ques-tions about the rationality, public participation, openness, and ac-countability of publicly funded and privately conferred services— concerns that are likely to be important to administrative law schol-ars and not easily assuaged.82 From an administrative law perspec-tive, then, we would ask different questions: whether contracts for social service delivery are produced in a fair and open manner with sufficient public input, and whether they afford procedural protec-tions, including private rights of action, to third-party beneficiaries. In addition, we might inquire into the potential conflict between pub-lic law norms of deference to agencies and private law principles of contract interpretation when it comes to adjudicating disputes.83

Contracting out raises a version of the principal-agent problem that arises whenever legislatures delegate decisionmaking authority to public bureaucracies. Because third-party beneficiaries (and the general public) are one step further removed from the private pro-vider than from the agency, however, the possibility of meaningful public oversight becomes increasingly remote. The obstacles to third party vindication seem particularly objectionable from an adminis-

80. See Oliver Hart et al., The Proper Scope of Government: Theory and an Applica-tion to Prisons, 112 Q.J. ECON. 1127, 1129 (1997) (defining the fundamental difference be-tween public and private ownership as the allocation of residual control rights to approve changes in uncontracted-for contingencies, and evincing a concern with the trade-off be-tween cost and quality).

81. See, e.g., Ira P. Robbins, The Impact of the Delegation Doctrine on Prison Privati-zation, 35 UCLA L. REV. 911 (1988).

82. See DONAHUE, supra note 2, at 83.
83. Historically, administrative law concerns have played a relatively minor role in debates over contracting out. Occasionally, commentators will advocate protecting the due process rights of the
contractors, who fear arbitrary decisionmaking by the government in the contract award and management process. In the same vein, recipients of discretionary government grants have sometimes argued for a more formalized decisionmaking process and suggested that discretionary awards ought to be subject to judicial review. Until the recent clamor for patients’ bills of rights in the context of health care delivery, however, the interests of the third-party beneficiaries in public-private contracts, the manner in which government negotiated the terms of those contracts with private contractors, and the potential incompatibility of private contract law principles with public law principles of deference to agency interpretations seemed decidedly secondary.


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

trative law perspective because the government appears to insulate itself from accountability by relying on private providers.

The constitutional constraints and elaborate procedural rules that govern agency decisionmaking only infrequently apply to private de-cisionmaking undertaken pursuant to public-private contract. Proce-dural rules, such as the requirement of notice and comment prior to the promulgation of a rule, provide points of entry for members of the public affected by the regulation and grounds to challenge ensuing policy choices. However, analogous opportunities for public access appear to be absent in the contracting process. For example, public-private contracts for health care delivery often incorporate statutory and regulatory requirements, making those requirements enforce-able as contractual terms. Through the incorporation of regulation into contract, Medicaid contracts for health care delivery can func-tion as a means of standard setting. And yet the contracting process lacks the procedural safeguards that characterize traditional notice-and-comment rulemaking.

Once contracts take effect, moreover, beneficiaries enjoy few pro-cedural rights to challenge decisionmaking that affects their inter-ests. Although courts might imply third-party beneficiary rights into contracts, the documents themselves almost never explicitly afford beneficiaries the right to sue. The absence of public participation or third-party rights of enforcement are particularly notable in light of the risk of ineffective agency oversight. Even when agencies have at their disposal the means to constrain private discretion, imposing constraints may be unappealing for political reasons or practically in-feasible.

These issues arise even more strikingly when governments con-tract for especially controversial functions, such as private prison management.84 Contracts between private prisons and state agencies can be highly detailed and specific, and in many respects (for exam-ple, the issuing of requests for proposals and the competitive bidding process) they conform to the traditional procurement model. At the same time, because of the unique service for which government is contracting, the need for such contracts to provide accountability is acute.

a. Examples.—To illustrate the administrative law concerns that arise when states contract out social services or important functions, I draw on three examples of contracting that I have developed in

84. Although only 3% of the prison population has been privatized—and although most of these are either juvenile facilities, INS detention centers, or low security facili-ties—there is a marked trend toward prison privatization in many states. See Hart et al., supra note80, at 1147, 1154.


CONTRACTING STATE 177

greater detail elsewhere: nursing homes, the federal Medicaid pro-gram, and private prisons.85

i. Nursing Homes.—Consider, for example, the mechanism by which the federal government funds the provision of health care to Medicaid patients in private nursing homes.86 Under the federal Medicaid program, the federal government reimburses states for Medicaid-eligible patient care. Medicaid funding overwhelmingly supports the private nursing home industry, subsidizing capital and operating expenditures and reimbursing more than sixty percent of eligible patient care.87 To qualify for participation in the federal pro-gram, states must comply with a complicated body of federal law and regulation. States in turn rely on a combination of licensing, regula-tion, and contract to impose obligations on the private nursing homes that deliver the care.88 Thus, private homes cannot collect reim-bursement from the state unless they comply with a state-provider agreement (a public-private contract) governing care delivery.89

Although private nursing homes are arguably the most heavily regulated of all health care delivery institutions in the United States,90 these public-private contracts still raise significant adminis-

85. See Freeman, supra note 3, at 598, 625.
86. Nursing homes are populated by residents whose care is paid for differently: some through Medicaid, others through Medicare, and still others through private insurance. In this example, however, I discuss only Medicaid patients.

87. See Butler, supra note 26, at 1318 (claiming that, at time of the article, Medicaid paid more than half of total nursing home revenues).

88. See Maureen Armour, A Nursing Home’s Good Faith Duty “to” Care: Redefining a Fragile Relationship Using the Law of Contract, 39 ST. LOUIS U. L.J. 217, 223 (1994) (re-ferring to the Texas process whereby the state regulatory agency determines homes quali-fied to participate in Medicaid and enters into contract with them for provision of services); see also Butler,supra note 26, at 1322-27.

89. See Butler, supra note 26, at 1322-27.
90. When Congress passed the Omnibus Balanced Budget Reconciliation Act of 1987 (OBBRA), Pub. L. No. 100-203, 101 Stat. 1330 (codified as amended in scattered sections of 42 U.S.C.), it established detailed statutory standards governing the quality of care in nursing homes.
See 4211, 101 Stat. at 1330-182 to 1330-208. Among other things, the OBBRA redefined the required quality of care to include an effective component reflecting patients’ quality of life and adopted a “Patients’ ‘Bill of Rights.’” See 42 U.S.C. 1395i-3(c) (1994). The statutory standards are quite detailed and reflect a crackdown on substandard care in nursing homes since the inception of Medicaid and Medicare in the 1960s. States enforce the new federal standards, elaborated in Department of Health and Human Ser-vices (HHS) regulations by regulating and licensing nursing facilities within their jurisdic-tions, predominantly relying on a state-administered survey and inspection process to en-sure compliance. By comparison with hospitals, for example, nursing homes are more closely and directly regulated by state agencies. With respect to nursing home care, the Health Care Financing Administration (HCFA) exerts relatively stringent oversight. For example, HCFA posts nursing home survey results on the web. Compare Health Care Fin. Admin., Nursing Home Database, at http://www.medicare.gov/NHCompare/home.asp (vis-ited Apr. 4, 2000) (providing search system to compare state ratings of different nursing homes), with DEPARTMENT OF HEALTH AND HUMAN SERVS., THE EXTERNAL REVIEW OF HOSPITAL QUALITY: A CALL FOR GREATER ACCOUNTABILITY (July 1999), at http://www.dhhs.gov/progorg/oei/reports/a381.pdf, and DEPARTMENT OF HEALTH AND HUMAN SERVS., THE EXTERNAL REVIEW OF HOSPITAL QUALITY: THE ROLE OF


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

trative law concerns. First, private litigants enjoy “no rights or pro-tectable expectations” regarding the care they receive from nursing homes.91 That is, despite extensive federal and state regulation, nurs-ing homes are not considered “public” providers of health care.92 Thus, private denials of care and private eviction determinations do not constitute state action, eliminating constitutional due process claims as a mechanism of oversight.93

Second, nursing home residents face significant obstacles to en-forcing contractual terms as third-party beneficiaries.94 Courts only reluctantly find state-provider contracts to be a source of third-party beneficiary claims against nursing homes for statutory violations.95 While nursing home residents might argue that the federal Medicaid statute creates an implied private right of action, as a general mat-ter, courts rarely recognize private rights of action to redress viola-tions of federal law.96 As with third-party beneficiary claims, to the extent that courts have recognized implied rights of action, they have done so to enforce “specially iterated rights” stipulated in legislation, such as those covering wrongful transfer or eviction decisions by the

ACCREDITATION (July 1999), at http://www.dhhs.gov/progorg/oei/reports/a382.pdf (detailing lack of accountability and quality oversight in accreditedhospitals).

91. Armour, supra note 88, at 254 (noting that providers’ lack of duty beyond the regulatory structure limits patients’ private right of action).

92. See Fuzie v. Manor Care, Inc., 461 F. Supp. 689, 695 (N.D. Ohio 1977).
93. Federal courts have, on occasion, held private providers to be state actors when they are the only providers of care in a government-regulated arrangement and where they therefore assume responsibility for the state’s mandated health care duties.
See Catanzano v. Dowling, 60 F.3d 113, 120 (2d Cir. 1995) (holding state-certified home health agency de-terminations regarding medical necessity of home health care to be state action since only certified home health agencies can provide care to Medicaid beneficiaries); J.K. v. Dillen-berg, 836 F. Supp. 694, 698-99 (D. Ariz. 1993) (holding that private regional behavioral health authorities were state actors where they were the sole providers of the state’s Medi-caid behavioral health services for children).

94. See Anthony Jon Waters,The Property in the Promise: A Study of the Third Party Beneficiary Rule, 98 HARV. L. REV. 1109, 1174-78 (1985) (describing some federal courts’ holdings that third-party beneficiaries have no private right of action on the contract where the claim is traditionally relegated to state law); cf. Martinez v. Socoma, 521 P.2d 841, 849 (1974) (denying unemployed residents’ claim as third-party beneficiaries to fed-eral training and employment contracts with local corporations because residents were merely incidental beneficiaries of the public purpose behind the contracts).

95. See Fuzie, 461 F. Supp. at 694-95, 697 (holding that a private nursing home was not a state actor and that the plaintiff had no implied private right of action under Medi-caid regulations, but finding that the plaintiff-patient did have a claim as a third-party beneficiary under the contract); see also Waters, supra note 94, at 1186-88 (describing Fuzie as an example of courts using the third-party beneficiary rule to create a private right to enforce public programs regardless of legislative intent).

96. See Richard B. Stewart & Cass R. Sunstein, Public Programs and Private Rights, 95 HARV. L. REV. 1193, 1302-06 (1982) (arguing that the Supreme Court has created a strong presumption against judicial recognition of private rights of action). Although some states have passed legislation affording patients private rights of action, this legislation o f-ten limits them to such specific rights as eviction rather than general standards of care. See Armour, supra note88, at 259-60.


CONTRACTING STATE 179

home.97 As a result, only patients who are wrongly evicted, but not those who receive substandard care, would have any chance of suc-cess using either of these arguments.

Alternatively, residents might seek to enforce the terms of their own contracts with providers (typically, new residents sign contracts upon admission to the nursing home). However, absent express con-tractual representation to the contrary, courts tend to interpret ad-mission contracts according to tort standards of quality of care, which usually disfavor residents.98 Relying on state or federal en-forcement of provider contract terms may be no more promising for residents than taking matters into their own hands. Contractual terms in the state-provider agreements may be vague or agency monitoring insufficient, due to a long tradition of relatively weak government oversight.99 Absent vicarious liability, the contracting agency may lack sufficient motivation to supervise the provider’s compliance with the agreement. In fact, governments have histori-cally taken a more aggressive approach to negotiating and monitor-ing procurement contracts than they have with regard to contracts governing the delivery of benefits.100

Even when an agency is armed with a detailed contract and a va-riety of enforcement tools, however, its interest in the operation of the contractual regime may not (and often will not) coincide with that of the ultimate consumer.101 An agency may care more about cost savings and blame shifting than quality of service,102 or it may be

97. See Armour, supra note88, at 259-60.
98.
See id. at 266-70 (summarizing standard critiques of the tort paradigm’s applica-tion in the nursing home context).

99. Historically, governments have purchased services like health care differently than they have procured goods such as airplanes. See BRUCE C. VLADECK, UNLOVING CARE: THE NURSING HOME TRAGEDY 98-99 (1980).

100. For example, procurement contracts obligate suppliers to meet specific perform-ance standards, whereas until recent years, state provider agreements rarely contained ei-ther performance standards or penalties for nonfulfillment. See id. at 98 (arguing that in the 1970s there was “no comparison between a typical government procurement contract and a typical ‘provider agreement’ between a state Medicaid agency and a nursing home”). While in theory the nursing home is required to meet all the requirements of the state’s li-censing and health codes, “the separation of the enforcement from the purchasing function seriously limits [the codes’] enforceability.” Id. at 99. On the weaknesses of reimbursement as a quality assurance tool when the Medicaid agency is not the licensing certification agency, see Butler, supra note 26, at 1329. Inattention to contracting details flowed from Medicaid’s roots as a redistributive claims processing operation.

101. There is nothing about the divergence of agency and Medicaid beneficiary inter-ests that is unique to managed care. As an outgrowth of welfare cash assistance programs, Medicaid has always had a “corporate culture” of saving money and preventing fraud. His-torically, insurance programs like Medicaid have had no responsibility for the health of beneficiaries. I thank Elizabeth Wehr for helpful comments on this point.

102. See James W. Fossett, Managed Care and Devolution, in MEDICAID AND DEVOLUTION, supra note 27, at 106, 120 (“The major continued political appeal of managed care rests on its perceived ability to produce budget savings while shifting financial risk and political blame for spending reductions to private agencies.”).


FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 28:155

more interested in maintaining smooth relationships with its con-tractual partners over the long term than in individual fairness or responsiveness to consumers in the short term. Even a well-meaning agency may be torn between competing goals. The price of closer scrutiny over private providers of care could prove to be the flexibil-ity, cost savings, and innovative capacity associated with relying on private providers in the first place—a trade-off that some agencies may not be willing to make.

ii. Medicaid and Managed Care.—Beyond the nursing home en-vironment, the Medicaid program offers another useful example of how public-private contracting to deliver social services is fraught with accountability problems. To obtain health care for Medicaid re-cipients, state Medicaid agencies purchase care from a range of pro-viders. In recent years, state agencies have shifted from employing a fee-for-service system to purchasing care for Medicaid beneficiaries from Managed Care Organizations (MCOs).103 As a result, states in-creasingly require Medicaid beneficiaries to choose among the MCOs offered by the state, much like employees in firms might choose from a menu of managed care providers offered by their employers. The Balanced Budget Act of 1997104 explicitly authorizes this practice by eliminating the prior requirement of a federal waiver for mandatory enrollment of Medicaid beneficiaries in managed care.105 Thus, states can now require Medicaid beneficiaries to enroll in managed care plans from which they may disenroll only “for cause” or at prescribed times.

Moreover, devolution of decisionmaking authority—a phenomenon that has coincided with the trend toward contracting out and which has specifically occurred in the Medicaid regime—can exacerbate monitoring problems associated with contractual relationships by adding the need for greater intergovernmental monitoring to gov-ernment-provider monitoring. In addition, as mentioned above, devo-

103. See John T. Boese, When Angry Patients Become Angry Prosecutors: Medical Ne-cessity Determinations, Quality of Care and the Qui Tam Law, 43 ST. LOUIS U. L.J. 53, 56 (1999) (reporting that nearly 17% of Medicare patients are enrolled in managed care pro-grams). In a fee-for-service system, consumers of health services rely on their physicians to determine the care they need and insurance companies compensate providers based on the volume and type of services provided. In theory, managed care responds to the tendency to overconsume health care by requiring primary care physicians with no financial stake in overtreatment to perform a “gatekeeping” function in determining the care required. See id. at 58-60.

104. Pub. L. No. 105-33, 4001-4002, 111 Stat. 251, 275-327 (codified as amended at 42 U.S.C. 1395w-21 (West Supp. 2000)) (enacting “Medicare+Choice” program).

105. See 4702, 111 Stat. at 494 (codified at 42 U.S.C. 1396d(a)(25), (t) (Supp. V 1999)). Federal Medicaid law has always permitted states to purchase managed care se r-vices for Medicaid beneficiaries who enroll on a voluntary basis. Most of the mandatory Medicaid managed care programs currently operate under one of two types of waivers au-thorized by section 1115 of the Social Security Act. See 42 U.S.C. 1315(a) (1994) (amended 1996).