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State Innovations in Child Welfare Financing

Publication Date
Mar 31, 2002

Recent fiscal reform initiatives have attempted to address some of the seemingly chronic problems of the child welfare system in the United States. This report describes how states are implementing fiscal reforms to contain costs or improve system performance. It also identifies issues that the implementation of fiscal reforms faces and describes how well fiscal reforms appear to be working. Many of these reforms are based on the managed care model that has been used in medicine for the past 30 years, while other reforms use approaches such as the privatization of services, performance contracting, and integrated funding.

Three general findings emerged from this review.

  1. Despite a concern that focusing on fiscal aspects of child welfare systems will lessen the focus on children and families, that does not appear to be what happened in the states reviewed. An integral part of the initiatives seems to be a push to do things better for the children and families served, or at least not to allow things to get worse for them when money is being saved.
  2. Available evidence does not support a conclusion that the fiscal reforms have had a major direct impact on outcomes, although impressionistic and anecdotal information points to some efficiencies and improvements in permanency outcomes. However, the fiscal reforms frequently encouraged agencies to develop creative and innovative approaches, which are improved upon over time, and changes in outcomes may not appear until much later.
  3. Ongoing problems in child welfare are not necessarily eliminated by changes in fiscal relationships. Instead, these new relationships often highlight aspects of the system that need to be more clearly defined. For example, in establishing payment rates and incentives, a state must clearly identify what it wants to obtain and what is needed to obtain it: attaining basic safety for children requires a different set of services than does achieving improvements in longstanding situations, and the goal will greatly affect the design and costs of services.

The report describes 23 initiatives in 22 states. These initiatives focus on altering the financial relationships between public child welfare agencies (states or counties) and private organizations with which they contract for services (here called contractors). The altered relationships presumably lead to greater efficiency in the use of resources, improved services, and better outcomes for children and families. The motivation for experimenting with reforms such as managed care is a belief that the traditional mechanisms of payment for such services, fee for services, results in wastefulness of resources and suboptimal quality of service to families. Many believe that fee-for-service arrangements provide incentives for using higher levels of care than required and for extending care for longer than necessary. In some states, it appears (at least initially) that cost savings were achieved when alternate arrangements (such as case rates and performance contracting) were implemented, and they were achieved without declines in permanency outcomes.

The most universally acclaimed feature of the fiscal reform efforts reviewed is the flexibility they afford in the provision of service. Unlike traditional categorical approaches to funding, contractors are given the freedom to deliver a wide range of services and move children more freely among living arrangements. Funding follows the child rather than the service. Decisionmaking about services is, therefore, freed up, presumably to provide more appropriately for children's needs. While this flexibility is viewed as a major advantage, it does take place in the context of fiscal limitations, so the flexibility is constrained. There is more flexibility to use lower levels of care than higher.

The Scope of the Initiatives. The scopes of the fiscal reforms vary considerably across states. In two states, the initiatives cover most child welfare services across the state (except for the initial intake and child abuse and neglect reports, which were retained as responsibilities of state workers in all the states). In other states, the initiatives cover smaller numbers of cases in more limited geographical areas. Some states continue to expand the scope of their programs while others have pulled back. Some initiatives include children and families in systems other than child welfare.

Twelve of the 22 states with fiscal reforms have or are moving toward statewide programs, although these programs often do not cover the entire caseload. Boundaries of programs are usually defined in terms of particular services (most often foster care or other substitute care) or groups (e.g., children with severe needs for whom intensive residential services might be used). Overall, scopes of the initiatives are highly specific to the states particular situations and objectives.

The Target Populations. Many of the initiatives focus on particular groups of children or families. This can lead to potential problems in targeting. At one end, focusing on low-risk cases to prevent involvement with the child welfare system may result in the inclusion of a number of cases that might not have become involved in the child welfare system in any case. In contrast, some programs focus on high-end cases. These cases are often the focus of policymakers, since they have such extensive need, make the greatest demands on resources of the system, and are the most costly. But focusing on this group requires that there are ways to deal with their severe problems. Underlying the establishment of fiscal reforms in such cases is the assumption that the group can be adequately served with fewer resources, for example, by caring for them in less intensive placements and providing extensive supportive services. Success of these fiscal reform initiatives depends on the extent to which the assumption holds and the children can be maintained in less intensive arrangements. In several states, it appears (at least initially) that some children can be maintained in less intensive settings and can be served at a lower cost, even with extensive support services. It is important to note that providing support services requires flexibility in funding and delivering services that can be difficult to achieve under current child welfare funding mechanisms.

Organizational Models. The initiatives follow varying organizational models. The most common is a lead agency model, in which the public agency contracts with a private agency that assumes responsibility for contracting with other providers and providing case management and coordination. Lead agencies may provide some services (beyond case management) themselves. Some initiatives use managed care organizations, private for-profit or not-for-profit entities that assumed responsibility for fiscal administration, case management, and developing a network of contracted service providers. A few public agencies maintain their traditional management roles, incorporating fiscal strategies into their contracts with private agencies (e.g., performance contracts), and sometimes assuming the role of a managed care organization. Currently evidence is lacking regarding the relative effectiveness of the different organizational models.

Standardized Decision Protocols. Several of the initiatives used standardized decision protocols. Such protocols hold the promise of greater consistency in decisions made about cases, as well as higher conformity to policy intent; however problems arise when the protocols cannot fully account for individual circumstances. Although greater consistency occurs, the question of the correctness of the decisions remains. Other problems occur when protocols are complex and difficult to implement. Further study is needed of the use of decision protocols in child welfare.

Evaluation. Several of the initiatives are being evaluated, and reports are available for a few. The evidence was mixed regarding the initiatives effectiveness; however, the evaluations tended to look at outcomes that are measures of system performance (and perhaps consumer satisfaction), rather than longer-term issues of child and family functioning. Perhaps most important, evaluation studies have so far revealed little about the conditions that are necessary for success or about those circumstances that lead to disappointment. Clearly, more extensive and more searching evaluation is needed.

Risk Sharing and Risk Management. One of the characteristics of managed care programs is that they provide for the sharing of risk among organizations, those responsible for financing services and those providing them. Thus, some financial risk is shifted from public agencies to private contractors. Three sources of risk may be identified: (1) number of children and families served (volume), (2) level of care provided (intensity), and (3) length of service (duration).

Traditionally, payment for child welfare services has been fee-for-service, which does not expose contractors to any of the three sources of risk, although it may result in losses to a contractor if the established fees do not cover the costs of the services. In some initiatives, a lead agency or managed care organization receives payments based on managed care principles but pays service providers on the basis of fee-for-service. However, the most common payment arrangement is the case rate, in which contractors are paid a fixed amount for each case served, exposing them to intensity and duration risk. In any arrangement, risk sharing may be implemented through provisions for bonuses or penalties for performance.

Contracts may limit the private agencys risk in various ways for example, through stop-loss provisions (limiting the contractors loss to a certain percentage over the contract amount) or risk pools (funds established by the state which contractors can access if their costs exceed payments by a certain percentage). Fewer than half of the initiatives reviewed, and for which the necessary information is available, appear to incorporate limits to contractor risk. Several states adjusted the rates or payment model after a period of operation, to re-align the payments with actual cost experience

It is evident, however, that contractors have other ways to reduce their financial liabilities under managed care contracts. Lead agencies or managed care entities sometimes institute utilization review procedures, in which decisions on level of care and other services are subjected to second-guessing, attempting to assure that the decisions were appropriate. Beyond that, contractors often have some control over case referral, decisions on cases, and service planning. Some are able to regulate the number of children with expensive needs accepted into their programs. Flexibility in the use of resources is a crucial element in these initiatives and is used to provide lower levels of care (that are less expensive) than might have been the case without these initiatives. Of course, this is one of the main ideas behind these approaches, but it is largely unknown the extent to which lower levels of care are appropriate or inappropriate, given the child's needs. Fiscal considerations clearly enter into these decisions, raising the question of how children's needs should be balanced with financial pressures. Some contractors appear to use various forms of triaging of cases or rationing of services to help control risk.

Still another device that contractors use is to rely on community resources or other funding sources. This too is a central objective of many programs. This effort can be seen as an attempt to shift responsibility for child welfare cases away from the child welfare system. Many reformers hope to do just that, arguing that communities ought to take responsibility for the welfare of their children. There is, of course, the philosophical question of whether this responsibility ought to reside in the state or in communities. More practically, there is considerable variation in the capacity of communities, and difficulties arise when they do not have the resources to accept this responsibility.

Challenges Faced by the Initiatives. Several major challenges must be addressed if fiscal reform initiatives are to have a positive impact.

  • Payment levels must be adequate and must take into account variations from expected levels of service. Risk and reward must be balanced and not too excessive on either end. There must be adequate resources for success, either within the agencies themselves or in the community.
  • States must have flexibility in selecting and paying for services, in order to provide incentives to try different ways of serving children and families and establish more effective and efficient systems. States should be supported in incorporating this flexibility, which they can achieve by integrating funding from several public agencies and by implementing title IV-E waivers.
  • Good data systems are important for successful management of any organization, but they are particularly critical in managed care arrangements. Substantial investment is needed in hardware, software, and training to ensure that information technology is available and used for system implementation and improvement.
  • It is essential that fiscal considerations, and attention to proximate system performance indicators, not be allowed to overshadow objectives of improved wellbeing of children and families. Quality control mechanisms that assure continual attention to those objectives need to be enforced.
  • The initiatives require complicated change processes, as states shift service delivery from public agencies to private contractors, implement team decisionmaking about cases, switch to a focus on outcomes rather than processes, and bring together a range of organizations to work on the initiatives. State and federal involvement to support development and implementation of fiscal reform initiatives should include providing training and technical assistance, disseminating written products, allowing sufficient start-up funds, adopting realistic implementation schedules, and convening forums to discuss emerging issues and policy decisions.