I can't speak to all of the poster's comments, but I can address the Medicaid point. I have worked for over 25 years for Medicaid contractors and have done so in 14 states, so I have a pretty good perspective on the pluses and minuses of outsourcing this service. Medicaid is usually the largest line item in a state's budget. Consequently, IT and other services required to run the program are not only expensive, but highly visible. Many state bureaucracies have concluded that they do not want to risk such exposure and are willing to pay for the privilege of pointing their fingers at a contractor whenever there are problems. Most of these contracts' operational expenses pay for non-IT services such as mail room, data entry, call center, and other staff. These personnel fall into the same category as the janitors, security personnel, and others that the poster identifies. Most of these contracts require the contractor to develop at a fixed price a system for the state to be used in the operations phase of the contract. State IT units are unwilling to take on such risk and, instead, only develop systems on a cost-plus basis. Most of these contracts require the contractor to supply a minimum number of IT staff devoted to change orders, so the contractor only makes additional money when the volume of change orders exceeds the capacity of the contracted minimum of staff. Additionally, maintenance required for bug fixes is usually not a reimbursable expense. Again, contractors are required to assume risk that states will not take on. Health care administration is a rapidly changing (You cannot imagine the impact of HIPAA on health care administrators, public and private), and contractors with multiple contracts are much better able to understand the changing environment, develop solutions for the changes, and leverage experience from all of their contracts for the benefit of each individual contract. Although there are only about five contractors in this market, the competition is brutal, resulting in lower prices for states. Although it would seem that states lose valuable expertise when an incumbent contractor loses a re-bid, the reality is that people working for the old contractor tend to go to work for the new contractor.
Are these contractors perfect? Absolutely not. I have seen failures that could only be resolved by kicking the contractor out. This is obviously painful to the contractor, but very disruptive to the state. States could save themselves this disruption by changing some of their procurement rules (e.g., the bidder with the lowest bid price exceeds a minimum technical score) that reward lower quality proposals. They could also increase the Medicaid program's performance by optimizing their end-to-end business processes prior to issuing an RFP. Many states' business processes are fundamentally broken. If you compare the head count used in a state-staffed operation vs. the head count used in a contractor-staffed operation, you often see a two- or three-to-one difference. Medicaid RFPs are notoriously ambiguous and routinely include phrases such as "including but limited to" in requirements statements. Fully modeled and documented processes generate fully developed use cases.