State Innovations in Child Welfare Financing. Payment Basis


Traditionally, public child welfare systems’ payment arrangements with private-sector service providers have been fee-for-service. Payments depend on both the type and the amount of service delivered. Embedded in this system, it has been claimed, is a perverse incentive for providers to deliver more reimbursable services than are needed or to prolong treatment beyond what is necessary. The crux of the argument against the fee-for-service system is that it encourages providers to use scarce resources inefficiently. Evidence used to support this argument includes long stays in foster care and lengthy wait lists for some services. Per diem payments, in which providers are paid for each day that service is delivered to a client, are based on the length of time that services are delivered (and often the type or intensity of services). As with fee-for-service payments, per diem payments may encourage the inefficient use of scarce resources when clients are provided services for longer than might be necessary if alternative arrangements were available.8 Under both these payment schemes, there is no financial incentive to change a service from one that is reimbursable to one that is not or that is reimbursable at a lower level. The states carry the financial risk for charges billed retrospectively for services already delivered.9

The perverse incentive argument underlies many states’ experimentation with alternative payments such as capitated rates, case rates, and block grants, which basically are prepayments for a service package. These payment methods allow some or all financial risk to be transferred to a private contractor, as payments are fixed and based on historical averages (and are sometimes dependent on geographic area and expected severity of need for services). They are made prospectively to cover all or a defined spread of services, which provides an incentive for contractors to control expenses in order to avoid losses and realize financial gains. Shifting from retrospective payment methods (fee-for-service and per diem) to prospective payments (capitated rates, case rates, and block grants) fundamentally changes the incentive system from one that offers incentives to retain cases on the caseload, to one with incentives for avoiding unnecessary placements or lengths of stay.10

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