State Innovations in Child Welfare Financing. Rate Setting


Contractors’ financial risk arises from three sources: intensity (the level or costliness of services that must be provided), duration (the length of time that services must be provided), and volume (the number of clients who must be served). The principal source for the estimate of costs is historical data on the patterns of service usage and costs of providing services. The reliability of such data is clearly critical and notoriously poor. Beyond that, there is no consensus on a best method or formula for establishing payments that guarantees that the payment level itself will pose no financial risk to the contractor.

As can be seen in Table 3-2, states use a wide variety of methods to set payment rates, ranging from states’ historical costs for specific types of services, particular populations, or bundles of services across a sample of cases, to time and cost studies conducted by an independent entity. Generally, states use an average of some historical cost data for the populations and services, and sometimes the geographical area, that the payment is intended to cover. Whether the payment is adequate depends not only on the accuracy of the historical data but also on the appropriate selection of representative populations and services. For instance, in Baltimore’s Child Welfare Managed Care initiative, twice as many children received therapeutic care than had been included in the case sample on which the payment rate was based; as a result, the payment rate was lower than the actual cost of providing services. When this happens, contractors can attempt to get the rates raised or receive supplemental funding from the public agency, or they can cover the shortfall through other means such as fundraising from private sources. Otherwise the agencies may experience such financial losses that the initiatives cease operating, as did the initiatives in Texas and Washington.

In addition to using historical costs to set the payment rate, some states settle on a final rate after negotiating with the contractor. Other states increase the payment rate obtained from historical data by some percentage to take into account the possibility that rate-setting methods underestimate the cost. For instance, Michigan increased by 15 percent the payment that was based on the state’s overall average costs for 5 years.

MediCal Expansion Helps Children Return Home

Before recent changes in California’s MediCal (Medicaid) regulations, children leaving residential treatment often lost benefits covering mental health services. Loss of mental health benefits meant that many children’s stays in residential facilities were prolonged because outpatient mental health services would be necessary to support their stability at home, and those services were unavailable or not covered by MediCal. Now, under California’s title XIX waiver, children discharged from residential treatment facilities are eligible for MediCal-covered mental health services to age 18. As a result of expanded MediCal coverage, children are now released to less restrictive family settings more quickly.

States also base payments to contractors on their payments to non-initiative programs delivering services to a similar population. For example, California’s Project Destiny pays the same case rate to initiative contractors for the delivery of community-based wraparound services to children at risk of residential placement as they pay for residential placement. The objective of this payment system is to achieve cost neutrality. California also uses a control group to adjust case rates every 6 months and to ensure cost neutrality.12

Georgia and Texas use a variation of this payment-setting method. Both states’ initiative contractors are paid (or, in Texas, were paid, since the PACE initiative is no longer in operation) an average of the level-of-care per diems paid to non-initiative contractors. In Georgia, the managed care organization (MCO) contracts with a network of providers to deliver services in a variety of settings that range from regular foster care to residential treatment. The MCO receives the average of the range of per diems that the state pays directly to service providers. Then the MCO pays to its network members the same per diem rate that the state would pay them if the MCO were not the intermediary. In this payment arrangement, the MCO attempts to ensure that services are provided in the least costly setting. When services are delivered in higher-cost settings, the MCO pays the provider a higher per diem rate than the state pays the MCO. At the time of the interview, the MCO administrator reported that the initiative had a larger number of children in high-level care than had been anticipated. As a result, the MCO was facing a financial shortfall and taking proactive measures to reduce further loss. The administrator was both seeking an increase in the MCO’s per diem and avoiding entry of children with high-level needs into the initiative.

Since there clearly is no consensus on the best rate-setting method, the question arises as to how well the states have estimated the cost of services delivered by or through their contractors. One way to explore this question is to examine contractor reports of payment adequacy and the extent to which they have sustained financial gains or losses or achieved cost neutrality.13 However, this analysis strategy is somewhat problematic because, as will be shown later, contractors typically have at their disposal a variety of ways to manage whatever budget is given to them.

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