State Innovations in Child Welfare Financing. 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.

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