State Innovations in Child Welfare Financing. Risk and Risk Management


Contractors entering into non-fee-for-service payment contracts may take on either full or partial financial risk. In a full-risk contract, the contractor absorbs all losses incurred as a result of providing services above those covered by the state payment, regardless of whether additional services or higher levels of care are deemed necessary. In the states using this approach, the amount of risk that the contractor is subject to is not explicit in the contract, and, in fact, neither the state nor the contractor is able to estimate accurately the extent of potential risk. As is depicted in Table 3-2, several of the initiatives feature contracts in which the contractors bear substantial or full risk. Somewhat more often, the contracts either explicitly limit contractors’ financial risk or contain risk-sharing agreements. Many of the states acknowledged that contractors are reluctant to take on full financial risk due to the inability to estimate accurately what that would cost. Requiring that they take full risk would likely result in contractors’ being unwilling or unable to participate in the initiatives.

Partial-risk contracts either explicitly limit contractors’ financial risk or contain risk-sharing agreements. Of these two types of partial-risk contracts, risk sharing is more common. The terms of partial-risk contracts vary considerably. Some states establish a risk pool from which contractors may draw down additional funds if their total service expenditures exceed the overall payment by a stipulated percentage. For instance, Florida’s lead agencies can access the risk pool if the number of children entering care is 5 percent more than expected. Other states’ contracts contain stop-loss provisions that stipulate the percentages of the total loss for which the contractor and state are liable. Maryland, for example, is responsible for 90 percent of the costs that exceed the contractor’s payments. Another variation is a risk corridor, in which a contractor is liable for a percentage of excessive costs. Beyond this percentage the state picks up the costs, and the contractor keeps a similar percentage of savings and returns the rest to the state. For example, in the first year of Ohio’s initiative, the contractors were responsible for the first 5 percent of costs that exceeded revenues and could keep the first 5 percent of “excess” revenues; that percentage rose to 10 percent in the second year, and 15 percent in the third and subsequent years. The next 10 percent of excess costs or revenues are shared equally by the contractors and the county, and beyond that the county is responsible.

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