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The provision of child welfare services has undergone significant changes during the 1990s. Some of the most important changes include a renewed focus on the rapid achievement of permanency goals for children, a large increase in the number of children in foster care, the continuing shift of responsibility for direct care to private agencies (both nonprofit and for-profit), the development of management information systems to monitor case progress more carefully, and the use of financial incentives to direct services toward desired goals. State child welfare systems have responded to these new circumstances in different ways and to varying degrees.
Generally, the provision of child welfare services is a partnership between government and private providers of service. Although states vary considerably in the division of responsibility, most states and localities contract with private nonprofit or for-profit organizations for the provision of at least some services to children and families. Until recently, these contracts were largely fee-for-service arrangements, in which the provider was paid by the state or county for delivering specific services.
This report describes the implementation by states of fiscal reforms in child welfare that replace traditional fee-for-service payment arrangements.(1) It also identifies issues that implementation of fiscal reforms faces and describes how well fiscal reforms are working. Many of these reforms, such as capitated rates, are based on the managed care model that has been used in medicine for the past 30 years. However, some reforms reflect other approaches, such as the privatization of services and performance contracting. Some states, perhaps most notably Kansas, have transformed their entire systems along these lines. Most states have chosen to implement fiscal reforms on a smaller scale, targeting specific populations or programs.
The fiscal reforms described in this report are all directed at changing the relationship between public child welfare authorities (states or counties) and private agencies by altering the financial arrangements between them. The intent is to influence the behavior of those private agencies. Although not all are managed care reforms, most have incorporated managed care strategies at least to some extent.
Origin of Managed Care
The concepts, principles, and tools of managed care were first developed in the medical field starting in the 1970s. Managed care was a response by the major payers of medical costs (employers and unions) to soaring medical care expenses. It was thought that a major source of higher costs was the fee-for-service financing system at the time. In that system, individual patients selected their health care providers, who had the sole discretion to set prices for their services. Third-party payers then footed the bill for any care that insured patients received. Critics charged that such a system was ripe for abuse by both patients and doctors. For patients, health care costs had become an abstraction represented by a bill that was paid by someone else. Doctors, it was argued, could increase their fees with little complaint from patients and could order unnecessary tests and procedures to increase revenue with no accountability.
The development of medical managed care was also driven by other dynamics. As medical malpractice suits began to proliferate, doctors responded by practicing “defensive medicine” in which they ordered tests or procedures in order to avoid accusations that they had been negligent. Further, in the fee-for-service system, doctors had little incentive to consult with one another and coordinate patient care. Patients could go directly to an expensive specialist or even multiple doctors at the same time. This could lead to overlapping treatments, dangerous prescription drug interactions, or other problems because no “gatekeeper” was aware of the full spectrum of the patient's medical history.
The American health care system underwent a revolution from a fee-for-service system to a predominately managed care system during the 1970s and 1980s. By 1998, three-quarters of privately insured Americans under the age of 65 were enrolled in some kind of managed care plan (Rosenbaum, 1998, p. 198).
Managed care organizations serve as “gatekeepers” that coordinate services for the patient. They seek to restrain doctors from ordering unnecessary tests and services by limiting certain reimbursements. They often require an authorization process that gives them the opportunity to review the diagnosis and medical recommendations and to suggest less expensive treatment. At the same time, they require patients to make a co-payment so that they have a financial incentive to avoid unnecessary procedures.
Managed Care in the Child Welfare System
In the early 1990s, some child welfare professionals began to advocate the adoption of managed care models, and many state child welfare systems began to try such arrangements. By the middle of the 1990s, some observers believed that managed care in child welfare was developing very rapidly (Scallet, Brach, and Steel, 1997) and was about to revolutionize the field (Emenhiser, Barker, and DeWoody, 1995). However, it appears that the adoption of managed care principles and tools in child welfare service systems has proceeded slowly. The Child Welfare League of America’s 1998 state and county managed care survey indicated that 29 states had some kind of managed care or privatization initiative (McCullough and Schmitt, 1999). It was estimated, however, that such initiatives targeted only as little as 10 percent of the nation’s child welfare population.
Perhaps the driving force in the development of managed care in child welfare was the rapidly escalating costs experienced by state child welfare systems in the late 1980s and early 1990s. This increase in costs was largely driven by increases in the numbers of child maltreatment reports and children entering out-of-home care. In 1984, a total of 1,727,000 children were reported as neglected or abused; this number had risen to 2,890,234 in 1993—an increase of 68 percent (Curtis et al., 1995). By 1996, that number had increased to 3,126,000 (Waldfogel, 1998). Reports declined in 1997 and 1998 before increasing again in 1999 (NCANDS, 1999, 2000, 2001). The number of children in out-of-home care grew by 65 percent between 1984 and 1993, from 270,000 to 445,000 (Curtis et al., 1995). By 1999, the number of children in care had increased to 581,000 (AFCARS, 2001).
Increases in the unit costs of services also added to the increase in the cost of foster care. Moreover, the substance abuse crisis contributed to an increase in children entering the system with multiple psychological and physical traumas, such as high rates of exposure to drugs in utero. In addition, improved diagnostic tools and treatment capability raised expectations for state agencies to provide service for complex conditions. Combined, these factors result in small numbers of children with very severe difficulties who may absorb a majority of resources.
All of these factors are likely to have contributed to increased foster care expenditures. Of course, increased costs may provide a greater benefit for the children in state care. Insofar as specialized foster care placements address the complex needs of children, better outcomes, if achieved, may justify the heftier price tag.
Because managed care practices were developed in the medical field, they require some adaptation to be applied to child welfare. Whether managed care can be adapted sufficiently to operate effectively in the child welfare arena depends on the following assumptions:
How each of these assumptions plays out in child welfare is considered next.
Economic Incentives
Some researchers and policymakers claim that the child welfare system has labored under economic incentives that keep children in foster care longer than may be necessary. They argue that the structure of federal funding for child welfare is the source of this problem. The problem is threefold. First, differential federal funding may distort local decisions. Since the federal government reimburses states for a share of the costs of foster care but not for in-home or preventive services, serving a child at home may be more expensive for the state even if those services are more appropriate and cost less overall. Federal reimbursement for a state’s foster care costs ranges from 50 percent of costs to over 75 percent depending on the state’s concentration of poor families. So, for example, a particular child may be better served by in-home aftercare services for $500 a month rather than a continued foster care placement at $1000 a month, but if the federal government reimburses the state for none of the in-home services and 75 percent of the foster care placement, returning the child home may be more expensive for the state. Workers and even supervisors may not consciously think about the public policy impact on their case decisions, but the overarching structure of the system may exert subtle pressure nonetheless.
A second part of the problem involves the available service array that results from the federal emphasis on foster care funding. Because services flow to the funding, many believe that the current reimbursement structure has led to foster care services that are better developed and more available than alternative service models. Therefore caseworkers are unable to base decisions on a range of service alternatives. Congress intended to remove incentives for placing children in foster care by creating the title IV-B Child Welfare Services Program in 1980 and the Family Preservation and Family Support Program (now called the Promoting Safe and Stable Families Program) in 1993. These programs provide grants to states for a variety of child welfare services, including those to help prevent foster care placement. However, the federal funding for title IV-B child welfare services is far less than for title IV-E foster care payments. In FY2002, title IV-B appropriations totaled less than 13 percent of title IV-E foster care appropriations.(2) In addition, title IV-E funds are an uncapped entitlement that reimburses states for a portion of foster care costs, no matter how fast they grow, while title IV-B is a capped matching grant that has grown quite slowly.
A third aspect of the issue relates to the provider base for foster care and residential children’s services. Some believe that the entitlement reimbursement under a fee-for-service model has led to excess service capacity. In order to maintain revenue, service providers may continually seek out new populations of children who might benefit from their care, keeping beds full at a higher level of care than may be needed. If the state or county is not vigilant regarding the level of care needed by individual children, it becomes easy to over-use expensive services because they are more readily available than lower cost alternatives. This “structural flaw,” according to some, has created a child welfare system that must maintain large numbers of children in care in order to perpetuate itself (Wulczyn, 2000).
The arguments about how the child welfare funding structure may affect service delivery have been widely discussed for a number of years. They remain speculative, however, and considerably more evidence is needed to support them. Furthermore, there are alternative explanations for these problems. Prominent among them is the chronic underfunding of child welfare services, which results in high caseloads and the inadequacy of other resources needed to help families work toward reunification of children.
Decisionmaking
In medical managed care models, there is the assumption that, for most ailments, a correct method exists for determining the most effective treatment. This has proven to be a hard assumption to justify. In fact, Eddy (1994) reports that “in general, observers looking at the same thing will disagree with each other or even with themselves from 10 percent to 50 percent of the time.” The assumption is even more unlikely to translate into the field of child welfare because of the difficulties in problem definition and a lack of research on best practice and the correctness of decisions. There is evidence of considerable disagreement among experts in the child welfare field as to the proper decision in particular cases (Schuerman, Rossi, and Budde, 1999).
Another challenge to the assumptions that underlie managed care is that social workers and agencies are not the final decisionmakers. For children in state custody, judges have the ultimate decisionmaking authority. They may order additional services, refuse a recommendation to return a child home, or delay the termination of parental rights when the agency is trying to move the child toward adoption. Hence, social service agencies that contract under managed care have limited control over the amount of services that will be provided. Judges are less subject to fiscal incentive structures that are designed to implement policy intent. This gap between the risk that agencies assume and the control they have over decisions is a problem that is likely to plague child welfare managed care.
Rate Setting
Another significant problem for child welfare managed care is that prepayment or prospective payment systems often rely on historical utilization data to set payment rates. If it is known that there are 20 people with diabetes in a population and it takes X dollars to treat them, predictions can be made about the future costs of providing that treatment. In child welfare, data of this sort are rarely available, and even where they are, they are often deficient.
Case mix is also a problem. In the medical arena, both managed care and traditional insurance providers have developed mechanisms to limit their exposure to costly cases. They do this to minimize risk, since to enroll large numbers of people with expensive, chronic, or disabling conditions would quickly generate high costs and therefore financial losses (Master, 1998).(3) Similar dynamics may occur in child welfare managed care. Insofar as child abuse and neglect are acute and episodic, a managed care approach is more likely to be successful; chronic, long-term conditions will cause difficulties. Ideally, there would be sufficient low-intensity users to balance out the risk involved with long-term conditions. However, child welfare cases are heavily weighted toward the chronic and long-term.
Prevention
Prevention advocacy is quite fashionable in child welfare, as in many other areas. However, there is scant evidence of the effects of most efforts at preventing child maltreatment (Littell and Schuerman, 1995). And there is substantial evidence that placement prevention programs do not have their intended effects (Schuerman, Rzepnicki, and Littell, 1994; U.S. Department of Health and Human Services, 2001).
If managed care agencies are unable to prevent entrance into foster care, they may attempt to limit service utilization by preventing recidivism. Little is known, however, about how to prevent a child who is discharged from foster care from reentering. The empirical data are scant in suggesting why some children who are discharged from care will ultimately re-enter (estimates are usually around 20 percent) (Goerge and Wulczyn, 1990). Interestingly, the strongest finding thus far is that placement duration is “strongly negatively associated with the rate of reentry” (Ibid). In other words, children who stay longer in foster care are the least likely to reenter care at a later point in time. This might suggest that a longer time in foster care gives parents the time they need to get on their feet and become stabilized before regaining custody of their children. Of course, the longer children are in foster care, the less time is available for them to experience either further maltreatment or re-entry into the system. In any event, the finding presents a problem to managed care efforts to reduce stays in foster care.
Community-Based and Faith-Based Organizations
Throughout American history, community-based organizations (CBOs) have provided assistance to families in need, although the emphasis placed on these services at different historical periods has varied. The past decade, however, has seen an unprecedented attempt to create a privileged role for CBOs in the social service delivery system. CBOs have considerable appeal. They combine themes such as reliance on private, local, and—frequently—religious agencies with an activist approach to addressing social problems with significant federal resources.
The presumed advantages of CBOs are numerous. One is the flexibility to enter into a variety of relationships with clients and with other service providers. Some states explicitly rely on the ability to develop provider networks that can respond to a family’s particular situation at the community level. A second advantage is the increased knowledge about available resources for the clients. Finally, there is the opportunity to develop more effective relationships with clients based on an intimate understanding of their circumstances (Kahn and Kamerman, 1996). However, disadvantages may include uneven distribution or unavailability of CBOs in some areas as well as the issue of the capacity of CBOs to provide extensive services or serve families and children with severe needs.
As the field has matured, the American public has become increasingly critical of many aspects of medical managed care, such as the requirements by insurance companies that providers obtain authorization before ordering a variety of procedures and tests (sometimes denying the requested care) and mechanisms that limit the freedom of patients to choose providers. (Public demands have led both houses of Congress to pass Patient's Bills of Rights.) The results of the widespread implementation of managed medical care have been ambiguous, and it can be reasonably said that the jury is still out. It is not evident that medical managed care has saved money. And everyone agrees it has not led to increased health care coverage for the uninsured. Many people have, however, argued that it has spawned its own kind of abuses and conundrums. What remains to develop is a consensus on whether the abuses and conundrums under the old system are qualitatively and quantitatively worse than those observed under the new system (Hurley, 1998). Described as “neither poison nor panacea” commentator Robert Hurley states, “A balanced summary judgement would be difficult, but it can be safely asserted that in general the experience has been better than its critics would acknowledge but less beneficial than apologists would contend.”
In child welfare, in spite of the impetus of rising costs, many factors have contributed to the states’ reluctance to jump aboard the managed care bandwagon. First, a diverse set of federal and state initiatives throughout the 1990s competed with managed care, the Adoption and Safe Families Act (ASFA)(4) clearly being the most important of these. While ASFA helped promote fiscal reform efforts in numerous states, the array of family preservation, reunification, and adoption-oriented initiatives it encouraged often competed with fiscal reforms for limited management resources. Second, state agencies have less leeway regarding protecting vulnerable children than third-party payers have in providing medical care. Most crucially, the ultimate decisionmaking authority in most cases remains with the courts rather than with the state agency, limiting the ability to make definitive case plans.
Information for this report was gathered through reviews of existing documentation about fiscal reforms in the states, including materials produced by the states themselves, results of research by other organizations such as the Child Welfare League of America, evaluation reports by independent evaluators, and conference presentations on the reforms made by state officials as well as their consultants and evaluators. Most of the existing materials used had been published during the period 1999 through 2002. From August 2000 through November 2001, states were contacted to fill in gaps in the publicly available information about their particular initiatives. At that time, officials were invited to verify the accuracy of the information that had been gathered from other sources.
Information was available about a considerable range of changes in the relationships between states and private agencies. In order to focus the report, the universe of interest was defined as those efforts that involved changes in financial arrangements between the state (or county) and private contractors(5) designed to affect the behavior of the private organizations. The programs described below do not include or represent every such initiative across the United States because some initiatives were excluded due to time and space limitations. The programs do constitute the majority of such efforts.
The following chapters describe the fiscal reforms, identify issues that were encountered in implementation, and specify what is known about how well they are working. The descriptive information (Chapter 2) covers the scope of these programs and their target populations, their objectives, and their organizational models. Chapter 3 discusses in detail their financial arrangements, with particular attention to issues of risk. Finally, the conclusion (Chapter 4) discusses some of the ongoing challenges in implementing fiscal reforms in child welfare that may be of particular interest to federal policymakers and identifies how those challenges have been addressed by the initiatives. Individual summaries of each initiative are presented in the appendix.
(1) The examination of this subject was aided considerably by a previous survey of such programs: McCullough and Schmitt, 1999.
(2) Title IV-E foster care appropriations in FY2002 were $5.06 billion, while the title IV-B appropriations were $597 million ($292 million for Subpart 1 and $375 million for Subpart 2).
(3) Medicaid, on the other hand, is a federally sponsored medical coverage program aimed at low-income people, many of whom have long-term, chronic health conditions. In contrast to private health insurance, managed care concepts have only very recently been applied to the Medicaid program. Part of the reason for this is that managed care has had limited success in controlling costs when applied to the chronic conditions that plague much of the Medicaid population.
(4) ASFA, passed in 1997, sought to achieve outcome goals in seven areas: reduce the recurrence of child abuse and/or neglect; reduce the incidence of child abuse and neglect in foster care; increase permanency for children in foster care; reduce time in foster care to reunification without increasing reentry to foster care; reduce time in foster care to adoption; increase placement stability; and reduce placement of young children in group homes or institutions (U.S. DHHS, 1999).
(5) In this report, “contractor” is meant broadly, to cover any private nonprofit or for-profit organization that has a contract with the state to deliver services or manage networks of providers. It can refer to a lead agency or a managed care organization as well as a direct service provider. In some initiatives, the organization assuming financial risk may provide no services directly but contract out for them. The organization may receive a capitated rate, case rate, or block grant, then pay service providers fee-for-service or per diems; thus, the service providers themselves assume no risk. In other initiatives, risk is transferred to service providers.
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