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.
Each of the three types of risk (volume, intensity, and duration) can be regulated by the contract. For instance, a contract can stipulate the number of children to be served by the contractor for the contract period and thereby limit the contractor’s exposure to volume risk. The contract may, on the other hand, contain a no-reject, no-eject clause. That is, the contractor may be prohibited from refusing referrals or discharging clients without state approval. This arrangement obviously places the contractor at greater volume risk. Similarly, the contractors’ exposure to duration risk can be limited by stipulating the length of time that treatment is to be provided. For instance, many states’ contracts stipulate that contractors are responsible for children’s care for a specified period regardless of the level of care needed. This type of contract exposes the contractor to greater risk if, overall, the level of provided care costs more than the total payment.
Not all administrators provided enough detailed information about their contracts to determine the extent to which states are using these types of contractual mechanisms to limit contractors’ financial risk. Typically, however, initiative contractors are not protected from risk due to delivering higher levels of care. In fact, the primary objective of using fiscal risk arrangements in many of the initiatives is to reduce the level of care that is provided. Contractors usually attempt to accomplish this objective by providing services in the least restrictive and least costly setting, usually in the community. In these types of arrangements, contractors are somewhat protected from intensity risk if they have partial- rather than full-risk contracts.
Besides the risk-sharing provisions of their contracts, a number of other features of state initiatives enable contractors to better manage fiscal risk. Generally, initiative contractors that have some control over case referral, decisionmaking, and service planning are able to use these features to stay within their limited budgets. For instance, contractors that have authority to refuse case referrals can regulate the number of children with high-end needs that enter their programs. According to several contractors, the authority to refuse referrals has been critical to their ability to manage expenditures. In Georgia’s MAAC, for example, refusing a referral, if it appears that the child is at risk of needing high-end services, is a primary mechanism for managing financial risk because MAAC remains responsible for providing whatever level of care children need after they are accepted. MAAC is more likely to refuse high-end service users if a large number of children already in its care are receiving intensive services such as residential treatment. Conversely, contractors with no-reject, no-eject contracts may receive more children with high-end needs than their fixed budgets can support. No-reject, no-eject contracts contributed to financial losses for Missouri’s contractor and the demise of Texas’ PACE initiative.
Although having some authority in the referral process may enable contractors to better manage their budgets, unless the target population is clearly identified and the state and the contractor agree on the target population, contractors may mis-target their selection of cases. For instance, Michigan is currently revising its Michigan Families contracts to clarify the target population in response to selection by contractors of lower-need families into the program instead of the high-need children that the state had intended the program to target.
The extent to which contractors have discretion over case decisionmaking, including level of care and services provided, also influences how well they can manage fixed budgets. For example, in state initiatives such as California’s Project Destiny and Tennessee’s Continuum of Care, contractor discretion over level of care and services is particularly important because payment rates are based on an average level of care, and the program objective is to reduce the level of care. In these types of initiatives, contractors typically have substantial decisionmaking discretion over both level of care and service planning. One way that contractors use their decisionmaking discretion to step children down to lower levels of care is by delivering intensive services in settings that are less expensive than residential facilities or group homes. In turn, the contractors’ ability to deliver services in alternative settings such as foster or biological parents’ homes is closely linked to flexibility in funding.
Unlike categorical funding that requires providers to use child welfare dollars to deliver specific services in particular treatment settings, flexible funding gives contractors freedom to deliver a wider range of services and move children more freely between treatment settings. With flexible funding, instead of applying a limited set of categorical services to every case, contractors can develop an individualized treatment plan for each child. Hence, not every child receives a set of expensive services when more limited services may meet the individual child’s needs. Also, since flexible dollars follow the child rather than the service, contractors can more easily shift the child between service settings. For example, contractors may decide to deliver intensive in-home services instead of placing a child in an expensive residential treatment setting. Alternatively, the child may be placed for a short time in residential treatment but then be quickly moved into a community setting with intensive services.
Among interviewed contractors, flexible funding and the individualized treatment that it makes possible was one of the more popular features of the initiatives. From the contractors’ perspective, flexible funding and individualized treatment are necessary conditions for making the best treatment decisions. But in managed care, fiscal constraint is also intended to influence contractors’ decisions. When fiscal constraint enters into treatment decisions, contractors may, perhaps unconsciously, use individualized treatment planning as a tool to manage their budgets.
Although most contractors reported that their clients’ essential service needs are usually met, other comments they made reveal an apparent conflict between treatment and fiscal considerations. For instance, one lead agency reported that at the start of the initiative, its strategy had been to provide intensive community-based services at the beginning of a case to avoid placing children in higher levels of care. However, some children ultimately entered residential treatment. Consequently, the lead agency incurred losses. From this experience, the lead agency “learned to hold back on up-front services in case a child needed residential treatment later in the case.” Another contractor said that it could work within its budget only if cases are triaged as the agency approaches its budget limit. Other contractors told us that although they don’t require case managers to work within a set case budget, if the agency is “headed for financial trouble, that [information] is shared with workers.” These contractors’ comments suggest that treatment decisions depend not only on individual service needs but also on a contractor’s financial status at the time a decision is made. Hence, a child entering into care at the beginning of a budget cycle may have a different treatment plan than a child with similar needs but who enters care when the budget is closer to depletion.
Similar to flexible funding and individualized treatment plans, many contractors rely on community resources and informal supports to both meet some of the needs of children and reduce the level of their own resources that would otherwise be used to meet those needs. Contractors often reported that one of their major roles was to assist the family to “build up their own community support” or “set up [community] services.” In fact, some states’ case rates are based on the assumption that the contractor will rely extensively on existing community resources. For instance, the state administrator of an initiative designed to move children from residential care into communities said that the case rate would be adequate if the MCO used existing community resources and natural supports. If, on the other hand, the MCO was unable to tap into other resources, it is presumed that the state payment would not cover the purchase of needed services. In another initiative that provides services to families with children at risk of entering placement, a major objective of case management is to link families with informal support--family, friends, churches, community organizations--so that overall the state would cover only about 25 percent of the costs of services, with 75 percent coming from local resources.
Many child welfare advocates have pointed to the importance of linking families to ongoing community and informal supports in maintaining children in their local communities. However, it is not clear that these community resources are good substitutes for child welfare services. In addition, the strategy of reducing child welfare expenditures by relying more on community resources assumes that communities are well equipped to assist troubled families. This may not be the case, and if not, contractors who count on community resources to reduce their expenditures could face budget shortfalls. Indeed, a lack of appropriate community resources could be one reason that some contractors have been unable to prevent residential placements and, as a result, have experienced financial losses.
Of course contractors do not rely solely on the mechanisms discussed above to manage their budgets. Many contractors have developed utilization management systems to help them regulate expenditures; these systems range in sophistication from simple to complex. The more simple systems consist of frequent case reviews that examine lengths of stay and levels of care and develop plans to reduce both. On the more complex end, one contractor (in Kentucky) has developed software to predict costs based on a family assessment and the types and lengths of services needed. This same contractor tracks all of the costs of providing services to a family and the balance of the case rate. One of Michigan’s contractors created a new position of utilization manager. The manager tracks how many children are receiving various services, the length of time children receive services, and the number of slots that are open. Also, the manager is responsible for approving services that the caseworkers provide. Despite the differing levels of sophistication of contractors’ utilization management systems, there is unanimous agreement among contractors that budget oversight receives greater attention under the new payment arrangements.