State Innovations in Child Welfare Financing. Risk Regulation


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.

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