State Innovations in Child Welfare Financing. Risk Source


Prospective payment systems in effect force the contractor to operate within a given budget or face financial loss?in managed care terminology, these schemes impose a financial risk on the contractor. The risks can be due to intensity, duration, or volume, all of which are discussed in more detail later in this section.11 To shift the risk from the public child welfare agency to the private contractor, payments are fixed at a specified rate. The risk facing the contractor is that the costs of meeting the service needs of a group of clients may be greater than the payments for those services.

The types of risk-shifting payment methods that are most commonly used in states experimenting with managed care fiscal reforms are capitated rates, case rates, and block grants. Table 3-1 summarizes the source of risk faced by contractors in each payment method.

Payment Method Retrospective Prospective Source of Risk to Contractor
Table 3-1
Financial Risk Associated with Payment Methods
Fee-for-service X   None
Per diem X   Intensity
Capitated rate   X Intensity
Case rate   X Intensity, duration
Block grant   X Intensity, duration, volume

Capitated rates are paid on a per-case per-month basis?the contractor is paid monthly for all contracted services for an enrolled population. The contractor receives the predetermined monthly amount, based on a specified number of cases to be served, regardless of the level of services that the enrolled population requires. If the population requires more services or more intensive services than projected, the contractor faces financial risks. If there is an increase in the number of cases served, there would be an increase in payments; thus the contractor is not at risk for volume. And since the contractor is paid as long as services are provided, the contractor is not at risk based on duration of services; payments do not stop until cases are disenrolled. Similar in some ways to per diem payments, in that contractors under both payment mechanisms avoid volume and duration risk, capitated rates offer a flexibility that per diems do not. Contractors can change service intensity more easily and usually can offer wraparound services and other supports to enable a switch to lower-cost services or placements.

Case rates are a fixed fee paid to a contractor for all services delivered to a client over a treatment period or an episode of care. Contractors with case rate contracts are at financial risk if the intensity and duration of care are greater than expected. But they are not at financial risk if there is an increase in the number of cases served, since there would be an increase in payments. For example, a contractor may receive a flat case rate of $5,000 for each family referred; some families receive services for 3 months, and some receive services for 9 months, but the case rate is the same. The contractor receives the same payment amount for all the families.

Kansas’s initiative clarifies the difference between capitated rates and case rates. Kansas paid lead agencies an initial episode of care case rate for foster care and adoption. However, lead agencies experienced losses, and the state realized that some factors affecting permanency were beyond the control of the lead agencies. Kansas then changed to a capitated per child/per month payment system for foster care and adoption so that lead agencies no longer experience risk based on duration or lose money on children who do not move to permanency in a timely fashion. Contractors receive the monthly rate as long as a child receives services.

Unlike capitated and case rates in which contractors receive a payment for each case served, a block grant is a single payment that is made for a specified period, usually annually, for all cases served during the payment period. These types of payments are also called allocations, budget transfers, or capitation payments (not to be confused with capitated rates, described above). Under block grants, contractors may experience financial losses if the intensity, duration, or volume of service is greater than anticipated. For example, a contractor may receive an annual block grant and then must serve all referred cases in its jurisdiction, regardless of the number of cases or their intensity or duration of services.

Table 3-2 summarizes the fiscal characteristics of the initiatives. It shows, for each initiative, the payment basis, risk source, rate-setting method, risk management features, fiscal incentives, adequacy of payment (as reported by the contractor), and contractor’s financial status. Each of these is discussed below, except for payment basis and risk source, which were described previously. The overall cost of each initiative is not addressed, since complete information was not available.

Initiative Payment Basis Risk Source Rate-Setting Method Risk Management Fiscal Incentives Payment Adequate Contractor’s Financial Statusa/
Table 3-2
Fiscal Features of Initiatives
“NA” indicates that information is not available.
Family Builders
Lead agencies receive a case rate, paid in three installments. None (case closed if no progress) Lead agencies’ cost estimates Lead agencies close case if no progress after 6 months. Case rate savings Yes Neutral
Project Destiny
Lead agencies receive a monthly case rate for 2 years. Intensity
Historical costs for highest levels of care Providers bear full risk but have some discretion over case decisionmaking. Case rate savings Yes Neutral
Boulder County Managed Care Pilot Project
County receives block grant and negotiates providers’ allocations and fee-for-service rates. Intensity
Historical data County bears full risk. Block grant savings Yes Neutral
Continuum of Care
Lead agencies receive a case rate, paid in four installments; they pay providers fee-for-service. Intensity


State’s historical cost for residential treatment Lead agencies bear full risk. None; savings are returned to the State. No Losses
Coalition for Children and Families
Lead agencies receive a block grant and must maintain time logs and justify their expenditures. Intensity
Prorated based on case counts A statewide risk pool can be tapped in cases of excess referrals or catastrophic service costs. Lead agencies can receive “excess earnings” of federal reimbursements as bonuses. Yes Neutral
Metropolitan Atlanta Alliance for Children (MAAC)
Managed care organization receives a single per diem rate and pays providers per diems that were negotiated with the State. Intensity Average per diem for all levels of care Managed care organization bears full risk but can refuse referrals. Per diem savings No Losses
Performance Contracting
Providers receive monthly administrative payments based on expected caseload ratios. Volume Historical data State bears full risk. Providers surpassing permanency standards can receive incentives; those not achieving standards lose referrals. NA NA
Public Private Partnerships
Lead agencies receive capitated rates for foster care and adoption, and case rates for family preservation. Intensity (foster care and adoption); Intensity and Duration (family preservation) Historical data Lead agencies bear full risk except that there is a risk corridor for foster care. Capitated and case rate savings NA NA
Quality Care
Lead agency receives a case rate. Intensity Lead agency’s cost estimate A stop-loss provision protects the lead agency. Case rate savings Yes NA
Baltimore Child Welfare Managed Care Project
Vendor receives a case rate. Intensity
State’s historical cost A stop-loss provision protects the vendor. Case rate savings No Neutral
Family-Based Services
Lead agencies receive block grant; service providers receive fee-for-service and per diem rates directly from the state; developing case rates. Intensity
NA Lead agencies bear full risk for cost of case management; state bears full risk for costs of services. Block grant savings; lead agencies may lose their contracts if they spend the services budget too quickly. Yes Neutral
Michigan Families
Lead agencies receive case rates. Intensity
State’s average cost over all children in all levels of care Lead agencies have a risk corridor, can accumulate dollars in a risk pool and have discretion over cases accepted. Case rate savings Yes Gains
Permanency Focused Reimbursement System
Lead agencies receive case rates, partially based on performance, plus administrative per diems. Intensity
State’s overall average costs for 5 years + 15 percent State bears financial risk. Providers risk not receiving incentive payments if placements are not successful. Case rate savings, plus lead agencies can receive incentive payments for successful placements. Yes Gains
Lead agency receives block grant from pooled funds. Intensity
Based on county size and school enrollment The counties bear full risk and can tap county reserves. None Yes Neutral
Interdepartmental Initiative for Children with Severe Needs.
Managed care organization receives a monthly case rate for 6 months plus fixed case management payment. Intensity Historical costs of highest level of care The state covers part of any loss experienced by the managed care organization. Case rate savings No Losses
New York
Safe and Timely Adoptions and Reunifications (STAR)
Provider agencies receive per diems. None to providers Historical data The city bears full risk. Providers can receive fiscal rewards based on permanency outcomes. NA NA
Managed care organizations receive case rates. Intensity Historical data Risk corridors established; county bears risk beyond the corridors. Case rate savings No NA
Oklahoma Children’s Services
Lead agencies and providers receive block grants. None; state keeps referrals within established limits to avoid excessive costs to contractors. Historical data on costs, number of children in care, and legislature’s allocation Lead agencies stop serving families when block grant is spent. None; savings are returned to the state. No Neutral
County paid providers fee-for-service and paid the lead agency a percentage of billable services for administrative costs. Administrative cost Historical data Planned to establish a risk corridor and case rates (initiative has ceased). Case rate savings, when fully implemented No Losses
Continuum of Care
Lead agencies receive per diems based on level of care. Intensity Independent time and cost study Lead agencies bear full risk but can receive augmented rates in special cases and have some discretion over case decision-making. For children that “step down,” agencies continue to receive initial per diem rate. No Losses
Permanency Achieved Through Coordinated Efforts (PACE)
Lead agency received a per diem. Intensity
Average per diem Lead agency bore full risk. Lead agency could keep 10 percent of per diem savings. No Losses
IV-E Waiver Demonstration
Lead agency received a monthly case rate. Intensity Negotiated with provider Lead agency bore full risk. Case rate savings No Losses
Bureau of Milwaukee Child Welfare
Lead agencies receive a case rate for in-home services and a block grant for out-of-home services (developing a case rate). Duration Case sample and needs assessment If a lead agency experiences a deficit, the state will cover it as long as the agency is trying to control costs. Lead agencies can receive fiscal rewards and penalties. Yes Neutral
a/ “Contractor” includes lead agencies, managed care organization, and service providers--any private nonprofit or for-profit organization that has a contract with the state to manage the delivery of services in order to achieve the objectives of the fiscal reform.

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