How do private prisons' payment models with governments work?
Executive summary
Private prisons are paid by governments under written contracts that define what the company must deliver and how it will be paid—most commonly per-diem or monthly rates tied to beds or inmates—while contracts often include performance clauses, penalties, and sometimes minimum-occupancy “bed guarantees” that shift financial risk back to the public [1] [2] [3].
1. How contracts set the pay: per‑diem, per‑bed, flat fees
Private operators typically receive payment according to a contract specifying a payment basis: a per‑diem (daily) or monthly rate per inmate, or a set fee based on facility size; the per‑diem model—paying by number housed—is the most common approach referenced across reporting [1] [4] [2].
2. The infamous “bed guarantee”: paying for emptiness
A widespread feature of many contracts is a minimum‑occupancy clause or “bed guarantee,” which obliges the government to pay for a high percentage of beds—often 80–100%—whether they are filled or not; studies by the Brennan Center and others show a majority of contracts include these provisions and that governments must compensate companies when occupancy falls below the guaranteed level [3] [5] [6].
3. Who bears operational risk, who benefits from flexibility
Contracts allocate risks: when governments want flexibility or rapid capacity expansion they hire private firms to transfer day‑to‑day operating risk, but not always financial risk—bed guarantees and long multi‑year escalators can lock taxpayers into payments and create predictable revenue for firms even if populations decline [7] [1] [5].
4. Performance language, penalties, and incentives — often outcome‑light
Many contracts include clauses for deductions or penalties for operational failures and sometimes bonuses for meeting specific metrics, yet critics and economists note contracts seldom tie pay to long‑term outcomes like reduced recidivism; where outcome‑driven procurement exists (Australia, New Zealand examples) incentive pay has been used, but most U.S. contracts focus on inputs and occupancy rather than rehabilitative outcomes [2] [7] [8].
5. Side revenue streams and cost tradeoffs inside contracts
Contracts also delineate subsidiary revenue and cost rules—such as who keeps inmate fees, medical co‑payments, or how tax‑exempt financing and per‑diem parity are treated—and private operators may rely on lower staffing costs, fewer training hours, and other efficiency levers to preserve margins, tradeoffs that affect safety and services according to multiple analyses [9] [7] [1].
6. Political influence, lobbying, and the incentive to maintain beds
Observers and watchdogs argue that bed guarantees and the profit model create lobbying incentives for policies that sustain or grow detention populations; private firms have documented political activity aimed at “educating” officials about partnerships, and commentators connect those activities to the broader concern that contract terms can create perverse incentives to keep beds full [10] [3] [6].
7. Accountability gaps and contested cost savings
Empirical comparisons of cost and quality remain contested: government audits and academic reviews find data limitations and mixed evidence on whether private operation saves money, while watchdogs document examples where private facilities underperformed or where reduced transparency made assessment difficult—leading some analysts to call for contracts that better align payment with outcomes and oversight [8] [11] [5].
8. What the contract design debate centers on now
Reform proposals in the reporting converge on one point: payment structures matter. Shifting from occupancy‑based payments and bed guarantees toward performance‑based contracts that reward reduced recidivism, safety, and rehabilitation would realign incentives, while critics insist contractual clauses that guarantee revenue perpetuate mass incarceration incentives and need stricter public scrutiny [7] [6] [8].