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Public Financing of Home and Community Services for Children and Youth with Serious Emotional Disturbances: Selected State Strategies

Publication Date
Feb 15, 2006


U.S. Department of Health and Human Services

Public Financing of Home and Community Services for Children and Youth with Serious Emotional Disturbances: Selected State Strategies

Executive Summary

Henry T. Ireys, Sheila Pires and Meridith Lee

Mathematica Policy Research, Inc.

June 2006

This report was prepared under contract #HHS-100-03-0024 between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and Mathematica Policy Research, Inc.. For additional information about the study, you may visit the DALTCP home page at or contact the ASPE Project Officer, Cille Kennedy, at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201. Her e-mail address is:

The opinions and views expressed in this report are those of the authors. They do not necessarily reflect the views of the Department of Health and Human Services, the contractor or any other funding organization.


Numerous reports have underscored the contradictions and deficiencies in the nation’s mental health service system for children with serious emotional disturbances (SED), including a heavy reliance on residential care and out-of-home placements (e.g., Campaign for Mental Health Reform 2005; New Freedom Commission on Mental Health 2003). Recent studies have also reinforced long-standing concerns that some parents have had to relinquish custody of their children solely to obtain treatment for their children’s behavioral or emotional problems (Government Accounting Office 2003). Overall, these reports have motivated federal and state legislators to consider new strategies for improving child mental health services and, in particular, enhancing access to effective home and community services.

Youth with SED include children and adolescents with chronic depression, major conduct disorders, substance abuse problems, and other behaviors that are challenging for families and communities. Many youth with SED are first identified in the schools, child welfare or juvenile justice systems, and they often claim a great deal of public attention because of the wide gap between their need for intensive treatment and the availability of appropriate services, including home-based counseling, respite care, family-to-family support, treatment foster care, and school-based mental health care. More and more studies indicate that these services are effective not only in improving mental health outcomes for youth with SED, but also in reducing or preventing stays in residential care and other out-of-home settings (Hawaii Department of Health 2004; Knitzer and Cooper 2006; Sheidow et al. 2004). Given these signs of progress, policymakers have expressed greater interest in making these services more widely available (Waxman 2006). For example, the 2005 Deficit Reduction Act (Public Law 109-171) authorizes demonstration projects for up to ten states to assess the effectiveness of home and community-based alternatives to psychiatric residential treatment facilities (PRTFs).

States and counties currently are pursuing numerous approaches to support home and community services and, more broadly, to initiate and sustain a fundamental transformation of their child mental health service systems. These approaches include enhancing access to Medicaid coverage of these services, re-directing funds from residential services to community care, integrating funds from the numerous agencies that serve children, designating care management entities to oversee services for high-risk populations, and implementing demonstration projects to develop specific financing models.

The purpose of this report is to present the results of a study of selected public financing mechanisms that states have used to pay for intensive home and community services for children and youth with SED.1 Although the study covers several key public strategies for funding home and community services for children with SED, it focuses particularly on the Medicaid home and community-based service (HCBS) waiver as a result of recent federal and state interest in this particular financing approach. Policymakers have focused on the HCBS waiver partly because this financing mechanism allows states to provide an expanded set of Medicaid services to a limited number of children. With an HCBS waiver, states have considerable flexibility in addressing the needs of high-risk children by paying for services not included in their standard Medicaid state plans; at the same time, they can maintain some control over costs by sharply limiting the number of children enrolled in the waiver program.

However, the HCBS waiver is only one of several methods for supporting intensive home and community services for youth with SED. States that already have such a waiver also use other financing mechanisms to support comprehensive mental health care for these children and their families. Previous studies have described the financing of model community-based programs (e.g., Bazelon Center 2003; Pires 2002), but there remains a need to examine in greater detail the mechanisms used by states to finance intensive home and community services and the reasons behind states’ decisions for choosing some mechanisms over others. Better information on strategies for selecting the best set of financing mechanisms may help states design and implement new initiatives for broadening home and community-based alternatives to psychiatric residential treatment and other out-of-home care.

To develop this information, the Office of the Assistant Secretary for Planning and Evaluation in the Department of Health and Human Services contracted with Mathematica Policy Research, Inc. to examine how states and communities have financed, or could finance, these services for youth with SED and their families.

Specific policy questions examined in the study include:

  • What are the benefits and disadvantages of HCBS waivers and other financing approaches for building home and community services as alternatives to residential care?
  • Why do states feel they need waivers and what are the arguments for or against amending the current 1915(c) waiver program to include PRTFs under the rubric of an “institution?”
  • How have different financing approaches been combined to support community alternatives to residential care or out-of-home placements?
  • What financing strategies are likely to contribute to the sustainability of improvements in mental health services for youth with SED?



This report is based on discussions with officials in three groups of states, and a review of federal and state reports on financing services for youth with SED and their families. The three groups of states include those that:

  • Are implementing broad, statewide reforms in their child mental health service systems (New Jersey and New Mexico);
  • Deliver services to youth with SED through HCBS waivers (Indiana, Kansas, New York, Vermont, and Wisconsin);2 and
  • Received awards in 2003 from CMS to assess the feasibility of developing an HCBS waiver as an alternative to psychiatric residential treatment facilities (Illinois, Maryland, Mississippi, Missouri, and Texas).

As a group, these states are using many different strategies to configure and support mental health services for youth with SED, are at varying stages in the development of statewide systems, and have encountered a diverse set of obstacles and opportunities for improving home and community services. Consequently, discussions with officials in these states covered a wide range of topics, including the legislative and policy background related to services for youth with SED, the reasons for selecting a given financing strategy or strategies, the benefits and challenges associated with HCBS waivers, the extent to which demonstration projects influenced a state’s selection of particular financing mechanisms, tactics for promoting coordination among key agencies, the role of residential treatment centers, and general “lessons learned” from recent state efforts to strengthen the financing of these services.



Discussions with state officials underscore the challenges of paying for the mix of intensive mental health services that are appropriate to each child and family by combining the resources of different agencies or expanding the type of services covered (or both). Many factors influence the way in which states address these challenges, including:

  • The proportion of children living in rural areas;
  • The set of services covered under the existing Medicaid plan and the status of the Medicaid budget;
  • Prior experience with demonstration projects involving home and community services for children with SED;
  • Leadership on this issue from the governor’s office and the extent of support from the state legislature;
  • The willingness of residential provider organizations to engage in discussions of new service models;
  • The strength of family advocacy and support for change; and
  • The history of collaboration among departments of child mental health, child welfare, juvenile justice, and special education.

Because of the many factors involved, state officials have to balance a variety of issues as they decide what financing strategies are most suitable given a state’s resources and constraints. Five findings from this study provide insights into this decision-making process.

First, state officials typically seek to combine a variety of mechanisms and funding sources because no one mechanism provides the flexibility and breadth needed to coordinate and pay for a comprehensive set of intensive home and community services. The mechanisms examined closely in this study include:

  • The 1915(c) HCBS waiver.
  • The Medicaid rehabilitation option.
  • The development of case rates for designated care management entities serving high-risk populations (whereby states pay a monthly fee for each child, allowing the child access to a flexible, individualized array of services and supports).
  • A provision in the Tax Equity and Fiscal Responsibility Act (TEFRA) known as the Katie Beckett provision.

Determining what combination of these funding mechanisms is appropriate for a particular state means balancing their advantages and disadvantages in light of the state’s fiscal, legislative, and agency resources (see Table ES.1). In addition to these resources, officials at the state or county level can blend or braid funds from multiple child-serving systems, which allows states to pay for a broader range of services than any one agency could cover. This approach is often used in conjunction with a case rate approach. Many states also have implemented Medicaid managed care (1915(b)) and research and demonstration (1115) waivers that allow for flexibility in types of covered services by implementing managed behavioral health systems. A few states and counties have designated sales, property, or income taxes to generate new revenue to enhance public mental health services, including services for youth with SED.

TABLE ES.1: Advantages and Disadvantages of Four Financing Mechanisms for Supporting Intensive Home and Community Services for Youth with SED
Funding Mechanism Advantages Disadvantages
HCBS waiver Allows states to provide intensive services not covered in state plan

Waives parental deeming requirements

Waives statewideness requirements

Promotes increase in number of providers offering intensive home and community based services

Gives states experience in pricing intensive services and individual care plans

Does not support preventive or “step-down” services

Substantial administrative effort for a relatively small number of youth

Application development and waiver implementation can be challenging

Does little to re-align funding across agencies and may introduce disincentives for sharing costs for community services

Does little to reduce geographic disparities within states

Expanding Medicaid rehabilitation option Offers states opportunities to include certain types of intensive home and community-based mental health services into state plan coverage

Services available to all Medicaid beneficiaries, not just subgroups

Risks increasing state Medicaid expenditures if rehabilitative services are used heavily and poorly managed
Case rates used by designated care management entities for high risk populations Allows state and local agencies to negotiate payment rates for specific high risk populations

Provides a mechanism for states to combine funding from different agencies to cover integrated, individualized plans of care

Permits monitoring of plan performance and quality of care

Requires experience in managed care technologies and financing models

Requires a sufficient case load to support a feasible economy of scale and risk management

TEFRA (Katie Beckett) provision Waives rules requiring application of parental income to determination of Medicaid eligibility for children who meet SSA’s disability definition, meet certain clinical criteria, and need an institutional level of care A sharply limited number of children with SED qualify for this provision

Expands Medicaid eligibility, thus posing potential cost issues

Does not expand types of home and community services covered

A second finding involves the importance of legislative and budgetary action at the state level. In several of the states in this study, the passage of state legislation directly focused on services for children has been an important impetus for interagency collaboration around the financing of services for youth with SED. Although state legislation alone is neither necessary nor sufficient for garnering financial support for intensive home and community services for youth with SED, it can move a state in the right direction by establishing expectations and goals, removing barriers to collaboration, and, in some cases, providing new dollars to build the infrastructure necessary to sustain these services. Discussions with state officials suggest that decisions about how to finance intensive community services have to account for a state’s history of legislative and political efforts to improve the child mental health service system.

Third, states and counties that carefully manage access to residential treatment services and psychiatric hospitals tend to have more resources for intensive home and community services. In the process of building financial support for intensive home and community services for children with SED, many states began by re-directing expenditures away from psychiatric hospitals and residential treatment services and toward community alternatives. This process, coupled with careful management of access to beds in both residential treatment facilities and in-patient psychiatric hospitals, is important because it has allowed states to conserve dollars and invest their resources in developing the provider capacity and infrastructure necessary for a community-based service system. Careful management of access to residential care is critical not only because such care is expensive but also because there is little evidence of its long-term effectiveness in solving problems to which it is usually applied.

Fourth, within states, certain administrative and budgetary procedures can support the cost-sharing of services among all or most of the agencies that serve children. Problems with interagency coordination and the associated duplication and gaps in services have long been recognized as a serious barrier to comprehensive child mental health care. In addition to instituting strategies for improving interagency coordination at a policy level, states also have established mechanisms for ensuring that funds from different agencies are integrated at the local level to ensure that the child and family can obtain needed services. In some states, for example, individualized plans of care specify which state agency (mental health, child welfare, juvenile justice, or special education) will pay for which services. In other states, dollars are blended to allow for integrated service delivery across child-serving systems. According to some state officials, case rates are an especially useful financing mechanism because: (1) several agencies can contribute dollars to the case rate for an individual child; and (2) agencies have a predictable amount of dollars to pay for a wide range of home and community services tailored to help children with SED achieve specific outcomes.

Fifth, because of the urgent needs of near-poor children with SED who have little or no insurance coverage for mental health care, and for families of these children who exhaust their coverage, financing mechanisms that allow these children to access intensive services (even if their families are not Medicaid eligible) are critically important. One of the principal advantages of the HCBS waivers is that they allow states to disregard Medicaid’s rules for using parental income in determining a child’s eligibility for Medicaid. Several state officials emphasized the importance of this particular component of the waiver because it provides states with a means for: (1) covering high-risk and uninsured or inadequately insured children who would not otherwise have access to mental health services; and (2) ensuring that families do not have to relinquish custody of a child with SED solely to obtain intensive mental health services.



The findings from this study have three major implications for policymakers concerned with improving mental health services to youth with SED and their families. First, sustained improvements in financing intensive home and community services for youth with SED depends on the development of effective partnerships between key agencies at the state and local levels. No simple recipe can create this partnership. In some cases, the key partnership was forged between the state mental health department and the Medicaid agency. Medicaid programs in every state now pay for a considerable portion of mental health services for youth with SED, while mental health agencies have the experience necessary to manage clinical care, certify providers, and assess service quality. The resources of both agencies can be used to support initiatives that provide appropriate and cost-effective services. Child welfare, juvenile justice and education agencies also are key because they often control considerable behavioral health dollars, and they serve the majority of children who need mental health services and supports.

In states that are actively pursuing ways to expand the availability of home and community-based services, agencies that serve children have developed new partnerships with one another. Discussions with state officials provided many examples of initiatives--often mandated by state legislation or budgetary processes--that bring different agencies together on behalf of youth with SED (e.g., mental health, Medicaid, child welfare, juvenile justice and education agencies). From a state perspective, the challenge is to ensure that the process of collaboration does not threaten the budget of any single agency, but instead leads to an equitable distribution of financial responsibility across the agencies. From a federal perspective, the challenge is to ensure that legislation directly affecting one system or one funding source (for example, Medicaid) does not unintentionally create barriers to interagency agreements at the state level.

The second implication involves the impact of prior demonstration projects funded under the original federal Child and Adolescent Service System Program, the current federal Comprehensive Community Mental Health Services for Children and Their Families Program, or other foundation-sponsored initiatives. These efforts spawned community level demonstration projects in virtually every state, and many officials with whom we spoke noted that the roots of current initiatives often lay in the experience gained during the implementation and operation of these projects. This finding underscores the strong potential for positive long-term outcomes of the demonstration projects authorized under the Deficit Reduction Act of 2005.

Finally, the study findings indicate that state officials value HCBS waivers because they can provide states with an additional mechanism for financing home and community services and support other efforts to manage access to residential treatment. Moreover, states would be interested in applying for an HCBS waiver for youth with SED if the criteria for documenting budget neutrality could be linked to psychiatric residential treatment facilities rather than to psychiatric hospitalization alone. In most states, very few children now enter psychiatric hospitals, and even fewer stay for long periods of time. Because most states are spending comparatively little on psychiatric hospitalization for children, they will not save many dollars, if any, by substituting intensive home or community services for treatment in these hospitals. However, as inpatient utilization has decreased, use of residential treatment has increased; this trend has placed corresponding demands on Medicaid dollars because Medicaid covers psychiatric residential care for children in most states. By replacing this residential care with more effective home and community services, states should be saving both federal and state Medicaid dollars, which could be available to enhance home and community services for youth with SED.



  1. States and communities can support child mental health services in many different ways. This report addresses several major public mechanisms available to all states, but it is not designed as a comprehensive review of all possible public and private strategies to finance services for youth with SED.

  2. Kansas and New York began operating their wavier programs in the mid 1990s and had 2,020 and 1,700 children enrolled in their waivers, respectively, as of 2005; Vermont began its waiver program in 1982 and had 140 children enrolled as of 2004. Indiana and Wisconsin began their waiver programs in 2005 and had 20 and 190 children enrolled, respectively, at the end of that year. Michigan obtained approval for an HCBS waiver for youth with SED in October 2005--too late to be included in this study.

The Full Report is also available from the DALTCP website ( or directly at
Children | Youth
Location- & Geography-Based Data
State Data | Urban Communities