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Caring for the Disabled: It’s Cost Effective

March 23, 2011 By C. Ford Runge, Guest Commentary

Editor’s note: Minnesota conservatives have brought a machete to the budget debate. However, one economist urges policymakers before slashing, take a closer look at programs’ economic benefits, especially in health care and services for people with disabilities.

Recently, University of Minnesota Applied Economist C. Ford Runge analyzed the records of an adult services provider serving people with disabilities. He found this particular program costs about $3.8 million in public funding but returns $11 million in economic benefits to the state, nearly three times the initial investment when counting the multiplier effect. Runge contends there are likely numerous care providers making similar positive economic impacts statewide.

In the summary below, Runge details his findings.

The huge state budget deficits left by the past administration have focused attention on areas where program cuts can generate extra revenue. One such area is Health and Human Services, and particularly long-term (LTC) for Minnesota’s disabled adult population. In a well-run state these and other programs would be evaluated for cost-effectiveness as a basis for budget cuts. But few efforts to evaluate them have been made. Because of my access to one such facility, where my disabled daughter is a client, I undertook such an assessment.

Federal, state and local governments spent about $3.9 billion to care for the 622,000 disabled and elderly Minnesotans (13 percent of the population) in fiscal year (FY) 2008. Federal support accounts for about 50 cents on the dollar, matched by about 45 cents in state and five cents in county funds. Federal funds worth almost $2 billion would not flow to Minnesota without state and county funding, so cuts in such funds involve a double sacrifice. While attention focuses on the costs of LTC programs, no systematic attempt to balance these costs against their benefits has been made until now.

Merrick, Inc., is a private, non-profit 501(c)(3) corporation, licensed by the Minnesota Department of Human Services (DHS) as an Adult Day Services (ADS), Day Training & Habilitation (DT&H), and Supported Employment Services (SES) provider. It is the largest DT&H provider in Ramsey County and one of the first established in Minnesota. Located in Vadnais Heights, it serves over 350 adult clients, employing 153 professional staff, managing a fleet of 64 vehicles, and developing job sites with over 70 businesses. Clients are typically picked up by vehicles owned and operated by Merrick and transported to and from their homes.

Approximately 180 clients spend their day (from about 8:30 am to 1:30 pm) entirely in the facility either receiving therapeutic services (50) or working (130) on various contracts outsourced to Merrick. The other 170 clients are transported from the facility to employer-based work sites. Some of the current partners include Accurate Components, Design House Greeting Cards, MedTox, Kowalski’s Markets, Dodge Nature Center, U of M Horticultural Science & Landscape Architecture Department, Warner’s Stellian and many more. Merrick pays clients according to the number of hours worked or, in some cases, the number of tasks performed.

About 33% of the total revenue paid to Merrick comes in the form of payments from the State of Minnesota, equal to $2,524,391 in FY 2010 with about the same amount from federal funds. An additional $823,043 (11%) is paid by Ramsey and other county funds when a client is not eligible/offered Medicaid funding. A separate per-diem is paid for transporting clients from home to work and back again, equal to $540,984 in FY ’10.

The benefits of this set of activities may be divided into six main subparts: (1) benefits to the professional staff employed by the company; (2) earnings and work satisfaction for the clients themselves; (3) benefits (avoided costs) to residential providers and individuals that would otherwise provide care during the period when clients are active at Merrick; (4) benefits from taxes paid by professionals, vehicular taxes and fees, and charitable gambling taxes and fees; (5) private sector benefits to company vendors; and (6) Merrick-leveraged foundation support and charitable giving to augment state and federal funding.

Merrick’s 153 professional staff, FY ’11 salaries averaged $27,132 and full-time benefit packages were averaged $5,817 per year, with total employee hours at 145 per month in fiscal year FY ’11, equal to total compensation for the year of just over four million dollars. Much of this income is returned to the Minnesota economy through a “multiplier effect” which, if a conservative wage-multiplier of 2 is used, implies final spending of $8,302,214 million dollars per year. Apart from direct wage effects, many of Merrick’s employees are actively engaged in professional development activities, increasing their skill levels so as to move up the professional ladder. As an example, since March 2006, Merrick has granted 42 scholarships totaling $63,000 to 31 employees using funds from the MN Employee Scholarship Program that can only be used by hourly employees for additional education and/or training.

Wages earned by Merrick clients are modest but are still a source of economic support and a wage stimulus to Minnesota. Total client earnings at Merrick in FY ’10 were $536,750. Using the same multiplier calculation described for professional staff such client wages generated $1,073,500 in final economic activity. Additionally, if only 50% of these earnings are spent on items subject to the State sales tax, clients at Merrick pay $18,000 a year in State sales tax and, based on a 2005 report, all clients in DT&H programs pay over $1.5 million annually in State sales tax. Beyond any monetary reward, wages earned by clients generate an incalculable but significant form of social capital: a sense of belonging and self-worth.

During the period each weekday that clients attend Merrick, they no longer draw on the resources of their family or group homes. While little data exists on the personal costs foregone in private homes, it is clear that Merrick employment allows family members who would otherwise be full-time caregivers to maintain outside employment themselves.

In the case of group homes, the approximate per-hour cost of care if $7.30 per hour. Avoiding these costs equals about $10,293 per client per year, resulting in a savings of $2,161,530 or 42.8 percent of the $5,048,782 in State and Federal funds paid to Merrick in per-diems in FY ’10. If a similar calculation was put to private home care, the total would be $3,422,423, or 67.8 percent of State and Federal funds paid to Merrick in FY ’10.

Merrick professionals and clients pay taxes. While client wages are typically too low to be subject to tax, professional staff salaries, averaging about $27,000, fall into the 5.35 percent range in Minnesota’s revenue calculations. If all 153 employees at Merrick paid at this rate, it would equal $144,432 in taxes paid to Minnesota.

Merrick also budgeted $401,766 for fleet fuel, maintenance, and license expense to operate its fleet of 65 vehicles, resulting in payments to local providers of fuel, maintenance and licensing bureaus that in turn spend these dollars. Finally, Merrick operates pull-tab booths at 13 locations with a FY ’11 forecasted revenue of $9,476,142. Of this, the state receives 5.2 percent or $492,759. Merrick hopes to generate 1% of this total to support its mission, equaling $102,393.

The companies and corporations that do business with Merrick, while clearly committed to hiring people with disabilities, do so consistent with sound business principles. In some cases, businesses are eligible for targeted jobs tax credit (TJTC) of up to 40% of the client’s first 12 months of wages. The federal minimum wage is $7.25. At 20 hours a week for 50 weeks, this equals $7,250 in the first year, of which 40 percent is $2,900.

Approximately 50 clients at Merrick work in this situation, implying total first-year tax credits of $145,000. In return, businesses receive work product equal to, and in some cases better than, that which would result from standard non-disabled wage and contract terms. This “win-win” arrangement is clearly an enormous source of satisfaction to employees with a disability, but it is also a benefit to the employer.

Much emphasis is given in some quarters to the need for disabled citizens to seek support not from government, but from their own resources and initiative. While the clients at Merrick are unlikely to seek out, apply for and find foundation or charitable support, the employees at Merrick, Inc. can and do. In fact, Merrick received an average of $390,556 per year from donations, fundraising, and grants in the last five years. While some of these grants might have gone elsewhere if Merrick did not exist, many are tied directly to Merrick and its mission.

When the six categories of benefits resulting from Merrick’s activities are brought together, they represent a significant counterweight to the $3,888,418 in program cost ($2,524,391 state + $823,043 counties + $540,984 transportation) incurred by the State of Minnesota and Counties to support Merrick’s clients. Taken together, these social dividends equal $11,000,853 including multiplier effects. This is nearly three times the amount the State and Counties spend to support Merrick’s mission. In effect, each of the dollar categories in brackets shows a way in which Merrick, Inc., “gives back” in local and state economic benefits to Minnesota and the Counties.

C. Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law at the University of Minnesota. This article reflects his views and not those of the University of Minnesota.

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