Poverty, Inc.

Walk down the eastern steps of the U.S. Capitol and follow Pennsylvania Avenue for several miles, and you’ll find yourself in District Heights, Maryland. Even without knowing much about the majority-Black suburb, you will quickly get the sense that District Heights is poor. Instead of shopping centers with Panera and Starbucks, you see names like Ace Cash Express, the nation’s largest check-cashing chain, and dd’s DISCOUNTS, a bargain clothing outlet. Alongside them is another class of business you might not notice, less obviously low-rent but still very much dependent on poverty. There’s Liberty Tax, a nationwide franchise operation that helps residents file for low-income tax credits; Pine Dentistry (formerly “Kool Smiles”), which serves patients on Medicaid; and Woodland Springs, an apartment complex that welcomes tenants with housing vouchers. These are private businesses, but they deliver public services using taxpayer dollars. And as the journalist Anne Kim argues in Poverty for Profit, these storefronts are more than just a signal of race and wealth. They are signposts of exploitation.

Kim, a Washington Monthly contributing editor, opens her book with a drive through District Heights, taking us inside each of these establishments to reveal how, here and across America, they serve as middlemen between government benefits and the poor. Over the past few decades, she reveals, a vast corporate ecosystem has grown to monopolize and extract enormous profits from various “markets” for social services: dentistry, dialysis, tax credits, job training, housing, and more. 

In theory, a private company could provide these services just as well as a government agency could—perhaps even better. But time and again Kim shows how these businesses cut corners, deliver poor results, and systematically abuse their clients, all in the name of profit. Both sides of the political divide have failed to police or even to comprehend this growing industry, and as a result are failing to address the issue. Liberals focus on increasing funding, not recognizing that these companies will eagerly siphon it away. Conservatives want more accountability for beneficiaries, even though such demands make the programs more complex, thereby giving private corporations opportunities to step in and drain away more taxpayer money. To truly fix the problem, Kim argues, you need to understand the poverty-for-profit industry.

Kim’s first chapter takes us to Rogers, Arkansas, where at Rogers Car-Mart you can get your taxes done and buy a used car at the same time. Businesses like this one have sprung up all over the country to take advantage of the Earned Income Tax Credit, a broadly popular policy that lifted 7 million above the poverty line in 2022. The EITC is the primary tax benefit for low-income workers, and serves as a critical chunk of annual income for many households. But the complexity of claiming it—multiple formulas, dozens of pages of reading—is a lure for predatory practices. 

When Kim visited Rogers Car-Mart in spring 2022 and asked for an estimate for herself, the business quoted her $198 to file a federal and state return. The preparer would tack on a $93 charge if Kim received a refund, along with a $27 “check printing fee” for an advance on the money. These costs add up to about 15 percent of the average federal refund in 2022. She could then use the rest of her refund as part of a down payment on a used car. Kim could have walked into Rogers Car-Mart expecting a $2,000 refund—the average amount that EITC-claiming families receive annually—and walked out of there with every penny going to this hybrid tax preparer/car dealer. “That, of course, is the idea,” Kim writes. Tax-time retailers will sell you discount shoes, pawned jewelry, and a rent-to-own TV along with your fee-laden return—all in order to capture as much of your refund as possible.

In the past few decades, a vast corporate ecosystem has grown to monopolize and extract enormous profits from “markets” for social services: dentistry, dialysis, tax credits, job training, housing, and more. These businesses cut corners, deliver poor results, and abuse their clients, all for profit.

What lures the working poor into these exploitative businesses is that they need help filing their taxes to get the EITC benefit. When policy makers devised the program in the 1970s, they were adamant that it should benefit working families who have income to report, rather than nonworking people. Over the years, lawmakers have demanded more and more layers of reporting to police that distinction, resulting in an ever more complex process for filers. The IRS instructions for the EITC are three times longer than instructions for the alternative minimum tax, a similar tax break that almost exclusively benefits the wealthy, and use eight different formulas to calculate eligibility for filers and their dependents.  

As strange as it may sound, Kim’s $318 quote at Rogers Car-Mart was a relative bargain. An investigation by a Washington, D.C., antipoverty nonprofit revealed that tax prep for EITC filers can run from $400 to as high as $1,200. To make matters worse, low-income workers often get subpar service from these largely unregulated preparers. An investigation by the Government Accountability Office in 2014 found that only two of 19 companies did a tax return correctly, and the Treasury Department found that in 2017 one-quarter of EITC dollars were issued improperly. Some outright fraudulent companies falsely inflate clients’ refunds and then pocket the difference. The IRS audits low-income filers five times as often as everyone else. When that happens, it’s the families, not the preparers they paid, who are on the hook. 

Meanwhile, the IRS is well aware that this needless complexity leads to waste and fraud and that the agency could easily solve this problem. The IRS already has all the wage and income information it needs to determine a filer’s EITC eligibility; it could automatically fill out and mail them their tax returns. (It could do the same for most middle- and lower-income Americans, who don’t have lots of complicated investments and deductions.) Democrats have long urged such reforms. Yet tax prep companies have spent millions on lobbying—up to $5 million in 2016 alone, according to a report by ProPublica—to stop the IRS from implementing this “return-free” filing, and they’ve found ready allies among Republicans in Congress. 

Next, Kim moves us to East Los Angeles, California, where 96 percent of residents are Hispanic and more than a quarter of children live in poverty. With only 11 percent of the population holding a bachelor’s degree (compared to 36 percent statewide), International College, a local job training program, would seem to offer a way up. But the for-profit school has only five courses, including a cake decoration class that promises to teach students “how to properly bake and ice a cake.” The course is online, and costs $5,100. Less than half of students who enrolled at International College in 2020 finished their classes—that is, except for cake decoration, which three students took and completed that year. 

There’s no evidence that anyone who graduated landed a job, because the school didn’t bother to fill in the job placement data required by the state, which covers the tuition for many of the students through the federally funded, state-administered Workforce Innovation and Opportunity Act (WIOA). Yet despite the school’s refusal to even try to justify its government subsidies, it remains on California’s approved list of workforce training providers. That list includes some high-performing institutions, but job seekers have no way to distinguish them from the reams of low-performing and sometimes shady options. The situation is hardly better in other states. Nationally, WIOA participants earn less per year than the typical worker who lacks a high school degree. 

A similar lack of oversight plagues Job Corps, the government’s largest education and training program for low-income people, with an annual budget of $1.7 billion. The program is mostly run by a duopoly of for-profit government contractors, with perennially poor results. A report by the inspector general in 2018 found that the program did not place students in “meaningful jobs appropriate to their training” and the majority of graduates made less than the median income for workers without high school diplomas. 

Yet money continues to flow to these programs, thanks to a combination of aggressive lobbying by the companies that profit, and good old-fashioned pork barrel politics. Job Corps participants are required to live in residences that require staff. These centers can provide quite a few jobs for some communities that desperately need employment, which makes closing the centers politically unpalatable. Job Corps contractors are not shy about reminding politicians how unpopular it would be to cut jobs in their own districts. This prevents government funding from going to better-performing programs, such as Year Up, a nonprofit that since 2000 has trained more than 29,000 people for jobs in IT, software development, and more. 

Kim credits much of the shift toward the corporate takeover of social services to Emanuel Savas, an academic and public administrator who is widely acknowledged as the father of “privatization.” His work fueled the conservative campaign in the 1980s to take government services away from unaccountable bureaucracies and entrust them to efficient, competitive entrepreneurs. Ronald Reagan embraced Savas’s ideas and appointed him as an assistant secretary at the Department of Housing and Urban Development. There, Savas championed the policy of moving public housing recipients out of government-run high-rises into private apartments by providing them with what were then called “Section 8” housing vouchers. Future presidents, including Bill Clinton, accelerated that policy. 

Kim acknowledges that many public housing projects were hellish places to live. But she also makes clear that housing vouchers haven’t lived up to their promise either. Advocates envisioned that vouchers would help the poor escape high-poverty neighborhoods. Yet the dearth of affordable housing generally, combined with the fact that landlords in most states aren’t required to rent to voucher recipients, means there is a great undersupply of apartments recipients can rent, and the vast majority that are available are in poor neighborhoods, with their attendant high crime and substandard schools. This gap between supply and demand also allows unscrupulous landlords to profit off the voucher holder’s limited options by providing substandard homes at inflated prices. An investigation by The Washington Post found that the city of D.C. was paying $2,467 per month for an apartment for an elderly resident when the market rate for a similar apartment was $1,613 per month.

In the criminal justice realm, the most infamous example of privatization is the for-profit prison industry. So tempting are the potential returns that some private companies have been known to build “speculative” prisons in rural areas with high unemployment, and then encourage local leaders to secure a contract. This works. 

But profiteering isn’t limited to for-profit incarceration. It’s rife in state-run institutions, too, which contract with outside vendors that charge inmates exorbitant fees for food, toiletries, health care, and other services. Some prison telecom vendors demand nearly $25 for a 15-minute in-state call, and companies like Western Union will charge up to $12 to transfer $25 into an inmate’s phone account. The disproportionately Black prison population performs forced labor for pennies an hour, a practice that civil rights advocates often compare to slavery. State prisons even bill inmates for their incarceration. One man in Florida was charged $50 per day for his nearly three-year stay in state prison (about $55,000 total). In Connecticut, the daily rate is $249. 

These and other exploitative arrangements continue in large part because state prison systems, at the behest of governors and legislatures, receive a cut of the profit. Essentially, state policy makers have decided to soak the families of inmates (because that’s who mostly pays these fees) to relieve themselves of having to ask taxpayers to shoulder more of the financial burden of administering public prisons.

Incentive structures are also to blame in other policy realms, like health care. Kim shows how many Medicaid programs use fee-for-service models that reward companies for performing more procedures rather than for providing better care. The average Medicaid reimbursement for child dental services is just 61 percent of the fees paid by private insurance. Most dentists refuse to take Medicaid patients for this reason. For those that do take Medicaid patients, many of them corporate-owned practices, this payment model encourages providers to cram as many bodies into a room as possible. Children get dental work with their heads barely a few feet apart. 

Liberals focus on increasing funding, not recognizing that these companies will eagerly siphon it away. Conservatives want more accountability for beneficiaries,
even though such demands make the programs more complex, thereby giving private corporations opportunities to step in and drain away more taxpayer money.

These providers also pressure parents to allow costly and unnecessary dental work on their children, for which reimbursements are much higher than for routine procedures like dental cleanings. Kim recounts instances of young children getting as many as 17 root canals and caps. An article published in 2022 by the Journal of the American Dental Association found that children on Medicaid were more likely to have multiple root canals than children with private insurance.

To perform these procedures on small children, many clinics have resorted to cruel tactics that are frowned upon elsewhere in commercial dentistry. A Kool Smiles clinic in Connecticut wrapped children in cocoon-like structures called “papoose boards” to keep them from squirming during long and painful procedures, according to a whistle-blower. The same whistleblower reported that the clinic kept a hair dryer for children who wet themselves from fear and pain. In Maryland, a Kool Smiles dentist propped open a patient’s mouth so painfully wide for a “baby root canal” that she vomited halfway through the procedure. The dentist turned the patient on her side and suctioned her mouth and throat so she would not choke. The Justice Department reached a $23.9 million settlement in 2018 with Benevis and its affiliated Kool Smiles dental clinics for submitting false claims and performing medically unnecessary procedures for children on Medicaid. Investigations of other Medicaid providers have revealed similarly horrifying dental practices and overtreatment. 

Government should consider clawing back some of the responsibilities it handed to private corporations. In many cases, public bureaucracies are better at delivering social services. If the IRS can eliminate the need for a predatory tax prep industry, why not empower it to do so?

Kim also shows that things are no better in the private dialysis market, which is largely controlled by two companies—DaVita and Fresenius Medical Care. To maximize profits on Medicaid’s low reimbursement rates for blood transfusions, these firms rush patients through dialysis in their factory-line centers, where people are regularly carted away with extreme exhaustion and sometimes heart failure after having the blood pumped through their bodies at dizzying speeds. Simply raising reimbursement rates is not the answer, Kim notes. Only months after Connecticut raised fees for Medicaid dentists in 2008, it saw a spike in expensive dental work as profiteers capitalized on the higher rates. 

As the Connecticut experience shows, these can be thorny issues to solve, but Kim outlines several steps that the government can take. To start off, she calls for the federal government to conduct a comprehensive “census” of privatized social services, which operate largely in the dark. With more information, policy makers can craft wiser solutions and conduct more effective oversight, which is badly needed, given the billions wasted and defrauded across the industry each year. Governments should follow up by exercising their policing powers—for instance, by kicking poorly performing colleges off their list of approved workforce training providers. 

Changing the incentive structure could also help. Kim laments how fee-for-service medical care leads to abuse, but she does not mention by name the leading alternative, value-based care, which rewards providers for delivering better health outcomes. Medicare, a handful of states, and countries like Germany, France, and the United Kingdom have adopted variants of this model, also known as “pay for performance,” with moderate success. The government could also leverage its huge buying power to improve what’s available to low-income families, similar to how big public health programs like the VA negotiate lower prices for prescriptions and medical care. 

More fundamentally, state and federal authorities should consider clawing back some of the responsibilities they have handed to private corporations. In many cases, government bureaucracies are better at delivering public services—for example, the most successful Job Corps programs, Kim notes, are run by the U.S. Forest Service. If the IRS can eliminate the need for EITC recipients and other Americans to rely on a predatory tax prep industry, why not empower it to do so? The Biden administration took a big step forward this year with a pilot project that allowed taxpayers in 12 states to file electronically for free with the IRS. In late May, the IRS announced that it would make the program permanent and expand it to all 50 states and the District of Columbia. State governments, too, can be more assertive—for instance, by narrowing their contracts with the managed care companies that handle Medicaid plans, taking decisions about granting care out of their hands. In all, Kim argues that America needs more governance, not less.

Kim concludes that the privatization experiment of the past 40 years has failed. For decades the federal government’s antipoverty programs have enabled corporations to profit off the backs of the poor and the taxpayers who support them. Yet politics on both sides prevents improvement because it misses the real problem. Politicians, especially conservatives, focus their accountability on the recipients of the services (by ensuring that welfare recipients are working, for example) rather than on the people doling out those services. Liberals and progressives tend to throw more money into these programs rather than evaluating them, out of fear that such evaluations might result in budget cuts or more privatization. And so the process continues, with government programs benefiting the people who need government help the least. Transparency is the first big step, and in exposing the inner workings of these private industries profiting from public money, Kim’s book is an important move toward reform.

The post Poverty, Inc. appeared first on Washington Monthly.