For children who have been abused or neglected by their caregivers, the child welfare system is an expensive and often poor substitute for a permanent home. The children and families in the system often have serious and difficult problems that can require intensive and time-consuming services. Unfortunately, most experts agree that the current system for caring for these children is inadequate. Program officials and policymakers alike are eager to find new and better solutions to meet the growing demands of this vulnerable group. Though not without controversy, managed care has emerged as one strategy to improve the overall care system for families in the child welfare system. The child welfare system is a complicated network of policies and programs designed to protect and promote the safety and well-being of children. Encompassing a broad range of activities, child welfare services include those designed to protect abused or neglected children, support and preserve families, care for the homeless and neglected, support family development, and provide out-of-home care when children must be removed from their families. The Adoption Assistance and Child Welfare Act of 1980 (P.L. 96-272) established requirements that states undertake reasonable efforts to prevent the need to remove abused and neglected children from their families. If separation is required, however, states must ensure adequate care for the children while providing the necessary services to help reunite the family or locate another permanent home for the child if reunification is inappropriate. The child welfare system has been under great pressure to meet increased demands. Over the last decade, rising caseloads have dramatically increased federal, state, and local spending for child welfare services. The needs of children and their families in the system are greater and more complex than ever before. Yet, the current system for funding and serving this more difficult population is fragmented and has strained public agencies’ ability to adequately meet service needs. The child welfare system consists of a myriad of agencies and programs that intervene when children are neglected or abused. State or county child welfare agencies carry the responsibility for ensuring the safety of these children through multiple programs funded by local, state, and federal governments. Children generally come to the attention of the child welfare system when someone—a physician, child care provider, or teacher, for example—reports to the state or local child welfare agency an allegation of abuse or neglect. Child protective services (CPS) workers respond to and investigate these reports, identify services such as parenting classes for the family, and determine whether to remove a child from the family’s home. If removal is warranted, the child is placed in any one of several foster care settings that offer different levels of care depending on the needs of the child. The lowest to highest levels of care—corresponding to the least to most costly foster care settings—include foster family home, therapeutic family foster home, group home, and residential treatment center. A child’s stay in foster care is considered temporary, until the family can be reunited, the child is adopted, or some other permanent living arrangement is made. In addition, states provide family preservation and support services to prevent out-of-home placement and help reunite families. These services include family counseling, respite care for parents and caregivers, and services to improve parenting skills and support child development. Primary responsibility for child welfare services rests with the states, and each has its own legal and administrative structures and programs to address the needs of children. In most states, the state child welfare agency makes major administrative decisions; in 12 states, however, counties administer child welfare programs with considerable autonomy to establish policies and priorities within broad state guidelines. While public workers provide some or all child welfare services in some locations, most state and county child welfare agencies have long relied on private service providers—predominantly nonprofit, community-based agencies—to work directly with children and families. For children entering the child welfare system, public caseworkers are typically responsible for (1) developing a service plan for the child that can identify out-of-home care, educational, and health service needs; (2) directly providing or arranging to purchase from private or other public providers the specified services; and (3) periodically monitoring the child’s progress. During the mid-1980s through the mid-1990s, the child welfare system witnessed dramatic increases in the number of children reported abused or neglected and placed in foster care. An estimated 3 million children were reported possible victims of abuse or neglect in 1996. Upon investigation, CPS workers confirmed maltreatment of almost a third of these reported children. During this same period, the foster care population grew almost 80 percent, from 280,000 children in 1986, to 502,000 in 1996. Child welfare experts attribute the rise in the foster care population to such trends as the increasing use of illegal drugs, especially among young mothers in inner-city areas; rising numbers of homeless families; and the growing number of children whose families live in poverty. With increasing foster care caseloads, expenditures for the basic needs of foster children and program administration have risen dramatically. From 1986 to 1996, federal costs for child welfare services increased nearly fivefold to $4.2 billion. The Congressional Budget Office estimates that this will rise to $5.9 billion by 2002. In addition to facing similar increases in these expenditures, state and local resources have been constrained by competing demands from other activities. States have found it increasingly difficult to maintain sufficient funding levels to ensure that service needs are met. To address these financial pressures, many states have cut child and family services or kept budgets constant. Further, resource constraints force public child welfare workers to prioritize their caseloads, which often means responding to emergency situations, leaving little time to attend to children already in out-of-home care. No single federal program fully supports the range of services that typically make up state and local child welfare programs. The major federal programs are found in the Social Security Act: Title IV-E Foster Care is an uncapped entitlement that reimburses states for a portion of foster care costs, such as food and shelter, daily supervision, administration, and training for agency staff, for only those children eligible under the Aid to Families With Dependent Children (AFDC) program. Title IV-E Adoption Assistance, also an uncapped entitlement, reimburses states for a portion of adoption costs, including payments to parents who adopt children with special needs as well as administrative and training costs, for only those children eligible under the Supplemental Security Income (SSI) or AFDC programs. Title IV-E Independent Living reimburses states for some of the cost of providing independent living services for older foster children. Title IV-B Child Welfare Services and Promoting Safe and Stable Families programs provide federal matching grants to states for up to 75 percent of the costs of services such as family preservation and support services, some foster care, and other child welfare services related to preventing out-of-home placements; reuniting families; finding adoptive families; protecting children’s safety; and preventing maltreatment. Title XX Social Services Block Grant gives states discretion to fund a wide array of social services for children, families, adults, and the elderly. Federal, state, and local governments share responsibility for funding the child welfare system. In fiscal year 1996, over 65 percent of the $4.7 billion in federal funding for child welfare services under titles IV and XX was for foster care services. Title IV funding of states’ child welfare program costs ranged from 50 to 77 percent. In addition, where federal sources are fixed by annual appropriations, as in title IV-B, states fund both the required match and any additional costs above the capped amount. Furthermore, through cost-sharing arrangements with counties, states pay all foster care costs for those children ineligible under the federal program. Nationwide, about half of all foster care placements were funded under title IV-E in fiscal year 1996. The child welfare service system is also fragmented. The service needs of children and families known to the child welfare system are more complex than in the past. Facing multiple problems of economic hardship, substance abuse, homelessness, and mental or physical illness, these children and their families more often have serious emotional, behavioral, and medical needs. However, rarely does a single state or local agency have control over the full array of services to appropriately address the needs of the child welfare population. Many of the needed services, such as mental health care and drug treatment, are outside the control of the child welfare system. Public child welfare agencies often must tap into a complex set of human service systems, which are usually supported by separate categorical funding sources and have different eligibility criteria. Gaining access to needed services, especially those outside the child welfare system, can be extremely difficult when other systems also have insufficient capacity or do not share child welfare’s priorities. Finally, service providers are rarely held accountable for achieving system objectives to improve the quality of care and service outcomes to ensure children do not languish in foster care. Public agencies traditionally use private service providers who are paid on a fee-for-service basis whereby a provider submits a bill and is reimbursed for the number and type of services delivered. Under this system, the provider has little incentive to, when appropriate, reduce the level of care as children’s functioning improves, discharge them from care, or monitor and assess the number of service units provided because these actions may result in lost revenues. The origins of managed care lie in the health sector. Prepaid health care plans were first developed to improve access to and continuity of health care while controlling costs. Early health maintenance organizations (HMO) served primarily an employed population. Contracting with prepaid, fixed-fee managed care plans to deliver health care services to Medicaid beneficiaries first became an option for states in the 1960s. As federal and state Medicaid expenditures soared, states increasingly turned to managed care programs to help bring costs under control and expand access to health care for low-income families. By 1997, states had extended prepaid managed care to more than 48 percent of the Medicaid population.