State Innovations in Child Welfare Financing. Fiscal Incentives, Payment Adequacy, and Contractors’ Financial Status


The last three columns of Table 3-2 summarize the initiatives’ fiscal incentives and contractors’ reports on the adequacy of the state payment rates and whether the agencies achieved cost neutrality, suffered losses, or reaped gains. Where prospective payments (capitated rate, case rate, or block grant) are used, contractors generally can experience savings when their costs are less than the payments (which offsets the risk they bear when their costs are more than the payments), although some states (such as Connecticut and Texas) limit the amount of cost savings that contractors can keep. Other contractor incentives are tied to contractor performance (Illinois) or permanency outcomes (Michigan, New York, and Wisconsin).

When assessing the contractors’ reports, it should be kept in mind that the initiatives have been operating over different time periods. Some initiatives were implemented in the mid-1990s, and others began as recently as January 2000. Those contractors with a longer operating history may have achieved equilibrium between losses and gains either as a result of their greater experience with a payment system or adjustments to the original payment rates and other aspects of their contracts. Recently implemented initiatives, on the other hand, may not have had enough time to master the new fiscal arrangements or make appropriate modifications to problematic aspects of their contracts. This explanation of the variety of experience with fiscal arrangements, however, is not consistently supported across states. Administrators of both older and more recently implemented initiatives report inadequate payment levels and financial shortfalls.

With regard to payment adequacy and financial status, states generally fall into four classes:

  • those reporting adequate payment levels without reservation;
  • those reporting adequate payment but with reservations;
  • those reporting inadequate payment but still operating; and
  • those reporting inadequate payments and whose initiatives are now defunct.

Improved Foster Care Recruitment a Lasting Legacy of Project PACE

The lead agency in Texas’s Project PACE used the flexibility provided by the title IV-E waiver to improve recruitment of new foster parents. Because the program accepted more than seven times the number of foster children specified in the contract, the lead agency had to invest heavily in foster parent recruitment. But the project went beyond the typical forms of outreach to potential foster parents. Project staff decided to approach it as a business, devising a marketing strategy as for a new product. They conducted polls and focus groups with potential foster parents to find out what their interests were and what obstacles might prevent people from becoming foster parents. This information was used to devise a highly effective outreach plan that attracted over 350 new foster parents. The lead agency then began to analyze the factors that led to disrupted placements for children. Having identified these factors, the lead agency developed extensive trainings for its foster parents to address the issues before they negatively affected children. Unfortunately, the quality of these services could not be achieved in a cost-neutral manner and the lead agency had to withdraw from its contract in 2001.

Of the contractors reporting that their payments were inadequate, those who had financial losses and abandoned the initiative are obviously the more severe instances.

Pennsylvania, Texas, and Washington are the three state initiatives that had large financial losses and were abandoned. In Pennsylvania, the lead agency administrator reported that the agency lost as much as $1,500 per month; however, the reason given for the initiative’s demise was not financial. Instead, both the state and lead agency administrators said that the program ended because of extraordinarily cumbersome administrative procedures, high lead agency staff attrition that necessitated recurrent intensive training, and public agency workers’ resistance. Of course, all of the cited reasons are likely to have driven the lead agency’s administrative costs upward.

The Texas initiative was terminated as a direct consequence of the payment rate. Generally, the average state reimbursement is 87 percent of any contractor’s actual cost. Contractors make up the difference through private fundraising. Because the initiative’s contractor received many more cases than it had anticipated, its board decided that the agency would be unable to make up the difference with private funding and asked the state to increase the per diem from $77 to $92. Because the state was willing to increase the rate to only $82/day, the contractor’s board did not renew the contract.

Washington’s initiative was terminated because the case rate was half of what the contractor actually needed to cover the costs of delivering services. In fact, the contractor estimated that the agency lost $80,000 a month on the program. According to the contractor, this large loss occurred primarily because many more children needing intensive services were referred to the program than had been anticipated.

Six other states report inadequate payment rates (Maryland and Oklahoma) and financial losses (Connecticut, Georgia, Missouri, and Tennessee), but continue to deliver services under their fiscal reform contracts. Among these six states, the reason cited most often for financial losses was the unexpectedly high volume of children needing more expensive services such as placement in residential treatment facilities and therapeutic foster care. Only one contractor reported sustaining financial losses because the agency delivered services that were not covered by the contract. The contractor believed that the services-in-home aftercare?were necessary to reduce children’s lengths of stay in residential treatment. However, he speculated that if these services had not been provided, the agency’s losses might have been even larger.

Only one of the four currently operating contractors with losses had explicit risk-sharing provisions in their contracts at the time of the loss, and that state (Missouri) covered part of the contractor’s financial loss. The remaining contractors address their financial losses in a number of other ways. Some attempt to make up losses through private fundraising. More often, agencies sustaining or anticipating a financial loss try to reduce their costs over the remainder of the year by providing fewer high-cost services or reducing the number of children in their care who need high-level services. At any rate, most contractors with or anticipating losses managed to stay in business.

Contractors reporting that their payments are adequate often did so with some reservation. For instance, contractors in three states commented that they were able to work within their budgets by triaging or rationing services. Two other contractors said that their payments were adequate to cover the costs of “essential” services but that additional funding would be needed in order to deliver longer-term rehabilitation or to reduce caseloads.

Contractors in only one state had actually gained financially from managed care fiscal reforms. In one of the two initiatives that Michigan has implemented, Permanency Focused Reimbursement System, the contractor attributed its gains to the fact that the performance-based case rates had increased faster than the alternative per diem rates that non-initiative contractors received. The agency used its unexpended payments to purchase independent research on the impact of services on different populations. Pending a review of other program outcomes, such as reducing placement disruption and lengths of stay, both the contractor and state consider this program to be successful.

Michigan’s other program, Michigan Families, has also resulted in financial gains for at least one contractor but is not considered to have been completely successful because the savings were achieved by serving a less needy population than the state had intended the program to target. Contractors put any unexpended funds into an agency risk pool, but it is very unlikely that these funds will be used for services unless the program serves more needy families. In response to the current situation, the state is revising the program contract and plans to seek bids from new contractors.

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