Governments Urged to Modernize Human-Service Payment Systems

Federal and state governments should modernize the way they pay for human services provided by charities, especially given the rising demand for help that has been fueled by the economic downturn, a new report says.

The report — which summarizes conclusions of a working group of nonprofit, academic, and other leaders who met in May — says the current system of cost-reimbursement contracts, instead of grants, and the increasing use of Medicaid “has strained service providers to the breaking point.”

Charities often get reimbursed less than their actual costs, with no margin for spending to improve their operations, it says.

The report, “Human Services Financing for the 21st Century: A Blueprint for Building Stronger Children and Families,” was released by Deloitte LLP, a consulting firm; Alliance for Children and Families, a national network of human-service charities; and the Hillside Family of Agencies, a charity in Rochester, N.Y.

The working group also said charities are hindered by accounting standards that force them to classify all revenue — including capital investment, or money raised for buildings or other projects to improve the organization — as operating income.

“The group suggested that nonprofits are unable to show donors how much it really takes to run an effective organization and that many nonprofits shy away from capital investment because they worry about violating tax rules and regulations,” the report says.

Among the report’s recommendations:

• Government agencies should adopt “pay-for-performance” purchasing systems that would give successful organizations extra money that could be used to improve and expand their operations. They should also provide money to help groups improve their “back-office” functions like accounting and billing.

• The federal government should develop a national human-services strategy, bringing together the variety of agencies that provide money to help individuals and families.

• Accounting rules should be changed to allow nonprofit groups to separate capital budgets from their income statements, as for-profit companies do.

• The federal government and charitable world should explore ways to set up a human-services investment-banking system that would provide money to nonprofit groups for mergers and acquisitions, new programs, and innovative approaches.

The three groups that released the report plan to organize a follow-up meeting in Washington later this year.