The Business Model of Private Prisons

The U.S. criminal justice system incarcerated approximately 2.1 million people in 2019. These people are incarcerated for a multitude of different crimes ranging from drug possession and petty larceny to grand theft auto and murder. In order to adequately house incarcerated individuals in the future, should numbers increase, facilities must be ready.

Private Prison vs. Public Prison

The private prison system raises a lot of questions. One that many people wonder about is how can a private company legally incarcerate people? Isn’t that the government’s job? The answer is yes, but the government does contract out quite a bit of their work.

A public prison is one that is completely owned by the government. This means that they have to provide the prison building, staff the guards and administration, and oversee all of the incarcerated individuals and everything that happens inside the prison. Even with a public prison, some of the services are outsourced to private contractors such as the food service, cleaning service, and maintenance.

With a private prison, many of the burdens are taken off the government and put onto a private company. Instead of all the business that goes along with running a prison, the government is responsible for sentencing, classifying, and assigning inmates to prison and providing oversight. Now that begs the question of how a for-profit prison makes money.

How a Private Prison Makes Money

A public prison is not a profit-generating entity. The end goal is to house incarcerated individuals in an attempt to rehabilitate them or remove them from the streets. A private prison, on the other hand, is run by a corporation. That corporation’s end goal is to profit from anything they deal in.

In order to make money as a private prison, the corporation enters into a contract with the government. This contract should state the basis for payment to the corporation. It can be based on the size of the prison, based on a monthly or yearly set amount, or in most cases, it is paid based on the number of inmates that the prison houses.

Let’s suppose that it costs $100 per day to incarcerate someone (assuming full capacity, including all administration costs), and the prison building can hold 1,000 inmates. A private prison can offer its services to the government and charge $150 per day per inmate. Generally speaking, the government will agree to these terms if the $150 is less than if the prison was publicly run. That difference is where the private prison makes its money.

As in any business, saving money wherever possible increases the bottom line. Expanding also allows the business to bring in more money, but it needs capital to do that.

Why Would a Private Prison Need to Be Publicly Traded?

As a business grows it can make the choice to go public. Essentially, this does a few things for the company that it can’t do as a privately held business.

With most businesses, exposure is the key to growth. The more people that know about the company, the more sales they can do. However, with a private prison, exposure isn’t something they really need. Instead, they need capital boosts for two other reasons.

If a private prison can “mark up” the cost of caring for an incarcerated individual by $50 per day, that means their prison can theoretically earn $50,000 per day on a prison that houses 1,000 inmates. If they can land another contract with the government to build a prison in the neighboring state, they could start earning an additional $50,000 per day by maxing out that prison. By going public, they can see a sudden influx of money that would allow them to build that second prison.

Still, there is another reason to go public for a private prison. In order to stay in business, these prisons need a constant stream of inmates coming in to replace those that have served their sentence. This means that laws have to be enforced, contracts renewed, and in some cases, laws more strictly enforced. Corporations may lobby lawmakers for their support or otherwise advocate for stronger enforcement of laws.

The Problem With Private Prisons

On the surface, a private prison seems like a great idea. If it costs the government $200 per day to incarcerate someone, and a private company comes along and says they can do it for $150 per day, then why not save the government money while allowing a corporation to profit? The problem lies in the economics behind prisoners.

One of the goals of the prison system is to rehabilitate people. Based on a U.S. Department of Justice study in which data from 24 states measured state recidivism rates from 2008 through 2018, the recidivism rate was 82%, possibly putting that goal in doubt.

Besides that point, if prison was 100% effective, the private prisons would be working themselves out of business. This makes one wonder: is prison supposed to rehabilitate the individual, or is it supposed to earn money? If the goal is to earn money, then a high prison population is the end goal.

Another problem that arises is the fact that these are for-profit businesses. This means that if they can cut staff pay or benefits or services from their list, then they save money. Suppose a prison cuts out the cleaning services and the cost per inmate drops to $90 per day. They instantly earn an additional $10 per day; a number that can add up quickly if there are 1,000 inmates in the facility. Cutting cleaning makes the company more money but provides unhealthy and inhumane living conditions for the inmates. Cutting costs ultimately affects the people incarcerated and diminishes the quality of their living quarters.

Finally, the law needs to be structured in such a way that it allows a steady stream of new inmates. This ties back to that lobbying aspect: stricter laws mean more people in the system. More people in the system means more money for the prison. Many have argued that this is the entire reason that the war on drugs was started: another set of laws that could incarcerate thousands of people every single year.

Prisons and the COVID-19 Pandemic

COVID-19 spread rapidly through the U.S. prison system due to overcrowding. Some lawmakers have advocated for prisoner releases to help reduce the prison population and slow the spread. Throughout the height of the pandemic, prison releases did not increase. The slight decline in prison populations amid the pandemic has been from fewer admissions and not more releases.

The Bottom Line

As of 2019, there are approximately 116,000 people incarcerated in private prisons, which represents 8% of the total federal and state prison population. Many of these prisons save the government money, but some actually cost more per inmate than a public facility would cost.

The capitalist mindset says any time an industry can be run privately it is better for the economy. The socialist mindset says that the government should be supplying those services. The realist says that the prison system is overcrowded as it is.