State Innovations in Child Welfare Financing. Structuring Risks and Rewards


How much should states pay for services? How should costs be apportioned?

The success of a fiscal reform initiative in a child welfare system depends to a great extent on the effective structuring of risks and rewards. The issues are both practical and philosophical. The practical issue involves establishing adequate rates and incentives for contractors and service providers: if the rates and incentives are inadequate, or if the risks and penalties are too severe, services will be inadequate or will not be available at all. Of course, the intent of most of the initiatives is to reduce inefficiencies, so the rates and incentives must not be set too high or they will not exert the necessary pressure to squeeze out excesses or increase efficiencies. The philosophical issue addresses the question of who should bear the responsibility for child welfare services: some fiscal reforms incorporate the expectation (or experience the result) that part of child welfare services is supported by sources outside the public child welfare system. Obviously, practical and philosophical issues are intertwined; setting inadequate payment rates can lead to incentives to shift costs to other systems such as mental health, juvenile justice, or special education systems. Here the issues are separated for the purposes of discussion.

Establishing realistic and adequate rates and incentives for contractors and service providers requires the ability to project utilization and risk. Medical managed care has actuarial and health care utilization data to use in pricing services; child welfare has no such database and no proven formula to use in projecting the costs of serving children and families. In addition, the pricing of child welfare reforms can be restricted by the categorical nature of much child welfare funding, which may preclude certain services, prevent collaborative arrangements, and create cash-flow problems for states due to retrospective payment methods.15

In setting payment rates and incentives under their initiatives, states generally relied on historical data on the costs of providing services for the targeted population in the covered geographic area. However, this often proved inadequate in projecting future costs. For example, the rate paid under the Baltimore managed care pilot was based on 3 years of historical data; however, the data were misleading because (1) twice as many children in the initiative needed therapeutic care as children in the historical data, and (2) the contractor was required to provide some services that were not in the historical data (including an intermediate level of care). Thus the actual caseload has required more expensive services than were predicted by the historical data.

A related issue is that states must balance the goal of limiting costs with the need for establishing and maintaining a stable and responsive provider community. In many communities, states must build provider capacity to address the full spectrum of needed services or serve the entire range of targeted children or families before a fiscal reform can be successful. And clearly it will not help states achieve their goals if the provider network fluctuates widely over time in the number of providers and their ability to deliver effective services. Although the adequacy of the provider community is influenced by many factors, payment rates are central. Rates must reflect both the actual costs of providing services and the investment required to support an effective provider community. In Florida, for instance, the legislature’s requirement that child welfare be privatized statewide has presented the challenge of building local provider capacity to take on complex child welfare responsibilities.

States found ways to address the rate-setting challenge. Recognizing that historical data may not produce realistic current rates, many initiatives limit the costs that contractors have to cover beyond a threshold (through risk sharing, risk corridors, and risk pools), or limit or exclude children likely to require extremely high levels of services. This can help maintain contractors’ fiscal viability and a stable provider community, but may result in higher costs to the state or in children or families not receiving needed services. Sometimes funding levels are sufficient to achieve safety and permanency at a minimal level, but true rehabilitation or long-term turnaround of chronic situations would require a much higher rate.

Several initiatives adjusted the rates or payment model after a period of operation, to re-align the rates with actual cost experience. Kansas, for example, changed from a case rate model to a capited per/child, per/month rate for foster care and adoption contracts, when contractors experienced fiscal difficulties under the case rate system. The state realized that achieving timely permanency was influenced by many factors beyond the contractors’ control.

Other states assume that the rates paid under the initiatives will not cover the costs of services and that contractors will make other provisions. This brings the discussion to the philosophical issue concerning responsibility for child welfare costs. In some of these states, contractors are expected to obtain funding from other sources to cover shortfalls; these sources include federal funding streams (especially TANF and Medicaid) and grants from foundations and philanthropic organizations. The demands placed by time-consuming fundraising activities or complex reporting requirements of other funding sources can greatly affect contractors’ operations (and were a factor in the demise of the initiative in Texas), while expecting a contractor to cover larger shortfalls than anticipated may force the contractor out of the initiative (as in Washington).

Some initiatives (such as the one in Massachusetts) incorporate expectations that community resources and natural supports will be utilized extensively. Whether these expectations can be met depends on high-quality resources being available. Although in the United States there is a long history of private-sector and community support for child welfare activities, the actual availability and amounts of contributions vary considerably across states and localities. Some reformers argue that communities ought to take responsibility for the welfare of their children, but there remains the question regarding whether this responsibility ought to reside in the state or in local communities.

It appears that, until adequate historical data and cost formulas are available, states will need to incorporate some flexibility in their initiatives. This includes risk sharing arrangements and mechanisms for adjusting rates periodically. States will have to address individually the philosophical question regarding responsibility for child welfare, although it is an issue that also should be addressed nationally.

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