State slows, but doesn't stop drive to privatize Alaska Psychiatric Institute

The Dunleavy administration’s drive to privatize the Alaska Psychiatric Institute with a no-bid contract with Wellpath collided head-on with an existing union contract that requires a feasibility study and gives the union the chance to offer an alternate plan detailing costs and benefits.

My guess is that state attorneys concluded that they were about to lose in court Monday because of a contract violation—the failure to do a feasibility study or allow the union to make a counter-offer in 30 days—and the state had no option but to halt the handover of API to Wellpath.

Health commissioner Adam Crum, who said at his confirmation hearings this month that privatization would proceed, announced the reversal Monday. Wellpath will still be getting $1 million a month for helping staff the hospital until the end of the year.

Crum said the state is hoping that within the next four weeks a consulting company will return with an updated feasibility study on the merits of putting the hospital under private management. After that the state would look for a competitive bid to run the institution.

While temporary budget director Donna Arduin has long been an advocate of privatizing public facilities, the Dunleavy administration has not made the case to Alaskans that the private option is superior.

The Dunleavy administration is assuming that the feasibility study will endorse privatization. But there are reasons not to make that assumption just yet.

The Boston-based consultant the state has hired for the feasibility study is on record, as of 2017, saying that privatization would make things worse at API.

The Public Consulting Group concluded this about full privatization: “Cost-benefit analysis revealed that, even after significant staff reduction, when all transition costs, contract monitoring costs, and provider margins are considered, this option proves to be more expensive to the state over a likely 5-year contract period. The additional staff reductions needed for budget neutrality would likely diminish the quality of service delivery.”

The Public Consulting Group was hired after the 2016 Legislature called for a privatization study of Alaska’s state-run psychiatric hospital.

“Our findings demonstrate that continued state management is not only the most advantageous route for generating overall cost savings, but that it also avoids many of the risks involved in contracting out the management of critical public infrastructure,” the company said in 2017.

Dunleavy administration advocates for privatization and employees of Wellpath will claim that conditions have changed in two years and they will have the ear of the consultants in the weeks ahead. They will push for a revised verdict. But the consulting firm has its credibility to consider in this process.

Its report two years ago made a strong case that API, “at the center of a fragile network of behavioral health services,” should stay in public hands.

The 2017 study assumed an 8 percent profit margin for a private company and that employees would get paid about 14 percent more under the private option, but take a substantial cut in benefits.

“The overall conclusion of this baseline analysis is that some reduction in staffed hours will need to occur if the state is to realize a savings while allowing a private provider to retain margins,” the study said.

The study said full privatization was cost prohibitive, and “without strong safeguards, further reductions of staff to unsafe levels” would be needed to make API financially viable.